PS6_AK - Econ 110, Spring 2010, L1 & L2 HW3 Solution A....

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HW3 Solution A. Chapter 14, problem 2, [(14.2)] 2. Figure 14.1 shows the situation facing Lite and Kool, Inc., a producer of running shoes. a. What quantity does Lite and Kool produce? To maximize profit, Lite and Kool produces the quantity at which marginal revenue equals marginal cost. Lite and Kool produces 100 pairs a week. b. What is the price of a pair of Lite and Kool shoes? To maximize profit, Lite and Kool charges the highest price that enables it to sell the 100 pairs of shoes, as read from the demand curve. Lite and Kool charges $80 a pair. c. What is Lite and Kool’s economic profit or economic loss? Economic profit equals total revenue minus total cost. The price is $80 a pair and the quantity sold is 100 pairs, so total revenue is $8,000. Average total cost is $60 a pair, so total cost equals $6,000. Economic profit equals $8,000 minus $6,000, so Lite and Kool makes an economic profit of $2,000 a week. Chapter 14, problem 3, [(14.2)] 1
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3. In the market for running shoes, all the firms face a similar demand curve and have similar cost curves to those of Lite and Kool in problem 2. a. What happens to the number of firms producing running shoes in the long run? Lite and Kool is making an economic profit. This profit attracts entry into the market so the number of firms increases. b. What happens to the price of running shoes in the long run? The price of a pair of running shoes falls in the long run. As new firms enter the market, the demand for Lite and Kools’ shoes decreases. The decrease in demand leads to the price of running shoes falling. c. What happens to the quantity of running shoes produced by Lite and Kool in the long run? The quantity of running shoes produced by Lite and Kool decreases in the long run. Lite and Kool is making an economic profit. This profit attracts entry into the market. As new firms enter, the demand for Lite and Kools’ shoes decreases. The decrease in demand leads to the quantity of running shoes produced by Lite and Kool decreasing. d. What happens to the quantity of running shoes in the entire market in the long run? The quantity of running shoes in the market as a whole increases in the long run. The economic profit attracts entry into the market. As new firms enter, each existing firm decreases its output a bit. But the new firms produce more shoes and, on net, the quantity of shoes in the entire market increases. e. Does Lite and Kool have excess capacity in the long run.
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PS6_AK - Econ 110, Spring 2010, L1 & L2 HW3 Solution A....

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