Ch14Solutions - Homework 9 Chapter14 Solutions 6. a) The...

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Homework 9 Chapter14 Solutions 6. a) The profit-maximizing price and quantity are shown in figure 6b. Kelty will sell the backpacks for $225, and will produce 400 backpacks at this price. Kelty chooses the quantity of backpacks to produce where MR=MC, which occurs at 400 backpacks, and the price is determined by Kelty’s demand curve at this profit-maximizing quantity. b) Kelty’s profit is approximately: Profit = TR TC = ( P ATC ) Q = (225 150)400 = $30,000 Figure 6b (Slide 02) c) Since Kelty is making a positive profit, firms will enter this market in the long run until profits are zero (and no firms will have further incentive to enter/ exit). Therefore, while aggregate output of backpacks will increases, Kelty will end up producing fewer backpacks for a lower price in the long run. Note the reason that profits have to be zero in the long run is because there are no barriers to entry in this market, so Kelty will not be able to sustain the high level of output at a high price as time progresses.
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7. Use this graph instead of the one in the text. a) The entry of new firms has caused Kelty’s demand curve to decrease, because they now have a smaller share of the overall market for backpacks. We observe that Kelty’s demand for backpacks has decreased by 400 backpacks. b) Kelty will set the price at $150 and produce 300 backpacks because this is the quantity where Kelty’s new MR=MC.
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c) Kelty’s loss is simply its negative profit and is approximately: Loss = - Profit ( ) = TC TR = ( ATC P ) Q = (200 150)300
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Ch14Solutions - Homework 9 Chapter14 Solutions 6. a) The...

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