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firm’s supply curve runs along the y-axis; at prices
above minimum average variable cost, a firm’s supply curve is its marginal cost curve. Working Problems 4 to 7 will give you a better understanding of a firm’s output decision. Working Problems 10 and 11 will give you a better understanding of output, price, and profit in the long run. Changing Tastes and Advancing Technology
s s s Working Problems 12 to 16 will give you a better understanding of changing tastes and advancing technologies. s (pp. 202–205) s s A permanent decrease in demand leads to a
smaller market output and a smaller number of
firms. A permanent increase in demand leads to a
larger market output and a larger number of firms.
The long-run effect of a change in demand on price
depends on whether there are external economies
(the price falls) or external diseconomies (the price
rises) or neither (the price remains constant).
New technologies increase supply and in the long
run lower the price and increase the quantity. Competition and Efficiency (pp. 212–213) Output, Price, and Profit in the Short Run
s Economic profit induces entry and economic loss
Entry increases supply and lowers price and profit.
Exit decreases supply and raises price and profit.
In long-run equilibrium, economic profit is zero.
There is no entry or exit. (pp. 208–211) The Firm’s Output Decision (pp. 198–201)
s s The market supply curve shows the sum of the
quantities supplied by each firm at each price.
Market demand and market supply determine
A firm might make a positive economic profit, a
zero economic profit, or incur an economic loss. Working Problems 8 and 9 will give you a better understanding of output, price, and profit in the short run. s Resources are used efficiently when we produce
goods and services in the quantities that people
value most highly.
Perfect competition achieves an efficient allocation. In long-run equilibrium, consumers pay the
lowest possible price and marginal social benefit
equals marginal social cost. Working Problems 17 and 18 will give you a better understanding of competition and efficiency. Key Terms
External diseconomies, 209
External economies, 209
Long-run market supply curve, 209 Marginal revenue, 196
Perfect competition, 196
Price taker, 196 Short-run market supply curve, 202
Shutdown point, 200
Total revenue, 196 000200010270728684_CH10_p195-220.qxd 6/23/11 4:13 PM Page 217 S tudy Plan Problems and Applications 217 STUDY PLAN PROBLEMS AND APPLICATIONS
You can work Problems 1 to 18 in MyEconLab Chapter 10 Study Plan and get instant feedback. What Is Perfect Competition? (Study Plan 10.1) Use the following information to work Problems 1
Lin’s makes fortune cookies that are identical to
those made by dozens of other firms, and there is
free entry in the fortune cookie market. Buyers and
sellers are well informed about prices.
1. In what type of market does Lin’s operate? What
determines the price of fortune cookies and what
determines Lin’s marginal revenue from fortune
2. a. If fortune cookies sell for $10 a box and Lin’s
offers its cookies for sale at $10.50 a box, how
many boxes does it sell?
b. If fortune cookies sell for $10 a box and Lin’s
offers its cookies for sale at $9.50 a box, how
many boxes does it sell?
3. 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 Firm’s Output Decision (Study Plan 10.2) Use the following table to work Problems 4 to 6.
Pat’s Pizza Kitchen is a price taker. Its costs are
Output Total cost (pizzas per hour) (dollars per hour) 0
69 4. 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.
5. What is Pat’s shutdown point and what is Pat’s
economic profit if it shuts down temporarily?
6. Derive Pat’s supply curve.
7. The market for paper is perfectly competitive
and there are 1,000 firms that produce paper.
The table sets out the market demand schedule
for paper. Price Quantity demanded (dollars per box) (thousands of boxes per week) 3.65
Each producer of paper has the following costs
when it uses its least-cost plant:
Output Marginal cost (boxes
per week) (dollars per
additional box) Average
variable cost Average
total cost (dollars per box) 200
a. What is the market price of paper?
b. What is the market’s output?
c. What is the output produced by each firm?
d. What is the economic profit made or economic
loss incurred by each firm?
Output, Price, and Profit in the Short Run
(Study Plan 10.3) 8. In Problem 7, as more and more computer users
read documents online rather than print them,
the market demand for paper decreases and in
the short run the d...
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