110_11s_SelectedQ_Ch12

110_11s_SelectedQ_Ch12 - Econ 110 Selected Questions From...

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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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2 hour. Economic profit equals total revenue minus total cost. Total revenue equals $56 ($14 multiplied by 4). Total cost is $54, so economic profit is $2. (ii) At $12 a pizza, Pat’s profit-maximizing output is 3 pizzas an hour and economic profit is $5. Pat’s maximizes its profit by producing the quantity at which marginal revenue equals marginal
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This note was uploaded on 05/20/2011 for the course ECON 110 taught by Professor Po during the Spring '11 term at HKU.

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110_11s_SelectedQ_Ch12 - Econ 110 Selected Questions From...

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