microeconomics book solution 13

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Solution Solution Perfect Competition and the Supply Curve 1. For each of the following, is the business a price-taking producer? Explain your answers. a. A cappuccino café in a university town where there are dozens of very similar cap- puccino cafés b. The makers of Pepsi-Cola c. One of many sellers of zucchini at a local farmers’ market 1. a. The cappuccino café is probably a price-taking producer, especially if there are a large number of cafés in town, since each will have a small market share and each produces a standardized product. b. There is only one manufacturer of Pepsi-Cola, and it works hard to differentiate its product from others in the minds of consumers. It is not a price-taking pro- ducer. c. Zucchini sellers at the farmers’ market are price-taking producers; there are many of them, none of whom can affect the market price for zucchini, which is a stan- dardized product. 2. For each of the following, is the industry perfectly competitive? Referring to market share, standardization of the product, and/or free entry and exit, explain your answers. a. Aspirin b. Alicia Keys concerts c. SUVs 2. a. Yes, aspirin is produced in a perfectly competitive industry. Many manufacturers produce aspirin, the product is standardized, and new manufacturers can easily enter and existing manufacturers can easily exit the industry. b. No, Alicia Keys concerts are not produced in a perfectly competitive industry. There is not free entry into the industry—there is only one Alicia Keys. c. No, SUVs are not produced in a perfectly competitive industry. There are only a few manufacturers of SUVs, each holding a large market share, and SUVs are not a standardized product in the minds of consumers. S-185 13 chapter: S185-S196_Krugman2e_PS_Ch13.qxp 9/16/08 9:22 PM Page S-185
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Solution 3. Kate’s Katering provides catered meals, and the catered meals industry is perfectly competitive. Kate’s machinery costs $100 per day and is the only fixed input. Her variable cost consists of the wages paid to the cooks and the food ingredients. The variable cost per day associated with each level of output is given in the accompany- ing table. a. Calculate the total cost, the average variable cost, the average total cost, and the marginal cost for each quantity of output. b. What is the break-even price? What is the shut-down price? c. Suppose that the price at which Kate can sell catered meals is $21 per meal. In the short run, will Kate earn a profit? In the short run, should she produce or shut down? d. Suppose that the price at which Kate can sell catered meals is $17 per meal. In the short run, will Kate earn a profit? In the short run, should she produce or shut down? e. Suppose that the price at which Kate can sell catered meals is $13 per meal. In the short run, will Kate earn a profit? In the short run, should she produce or shut down?
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