1
Econ 110
Selected Questions From Chapter 12 - PERFECT COMPETITION
1.
Lin’s fortune cookies are identical to the fortune cookies made by dozens of other firms and there is free
entry in the fortune cookie market. Buyers and sellers are well informed about prices.
a.
In what type of market does Lin’s operate?
Lin is operating in a perfectly competitive market.
b.
What determines the price of fortune cookies?
The equilibrium price is determined at the equilibrium between the market demand and the market
supply.
c.
What determines Lin’s marginal revenue of fortune cookies?
Lin’s marginal revenue equals the market price of a box of cookies.
d.
If fortune cookies sell for $10 a box and Lin offers his cookies for sale at $10.50 a box, how many
boxes does he sell?
Lin will sell no boxes of fortune cookies.
e.
If fortune cookies sell for $10 a box and Lin offers his cookies for sale at $9.50 a box, how many boxes
does he sell?
All
buyers will want to buy Lin’s cookies so the demand for Lin’s cookies is essentially infinite. More
realistically, Lin would probably sell the quantity that maximizes his profit but that profit will be less
than if he sells at the going market price of $10 a box.
f.
What is the elasticity of demand for Lin’s fortune cookies and how does it differ from the elasticity of
the market demand for fortune cookies?
The elasticity of demand for Lin’s cookies is infinite. The elasticity of demand in the market for
cookies is not infinite.
2.
Pat’s Pizza Kitchen is a price taker. Its costs are in the table.
a.
Calculate Pat’s profit-maximizing output and economic profit
if the market price is
(i)
$14 a pizza.
(ii)
$12 a pizza.
(iii) $10 a pizza.
(i)
At $14 a pizza, Pat’s profit-maximizing output is 4
pizzas an hour and economic profit is $2 an hour.
Pat’s maximizes its profit by producing the quantity
at which marginal revenue equals marginal cost. In perfect competition, marginal revenue
equals price, which is $14 a pizza. The marginal cost is the change in total cost when output is
increased by 1 pizza an hour. The marginal cost of increasing output from 3 to 4 pizzas an
hour is $13 ($54 minus $41). The marginal cost of increasing output from 4 to 5 pizzas an hour
is $15 ($69 minus $54). So the marginal cost of the fourth pizza is half-way between $13 and
$15, which is $14. Marginal cost equals marginal revenue when Pat produces 4 pizzas an
Output
(pizzas per hour)
Total cost
(dollars per hour)
0
10
1
21
2
30
3
41
4
54
5
69

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