General Economics : Suppose that the monthly market demand schedule

Subject: Economics    / General Economics
Question

Suppose that the monthly market demand schedule for Frisbees is:

Price

$8

$7

$6

$5

$4

$3

$2

$1

Quantity Demanded

1,000

2,000

4,000

8,000

16,000

32,000

64,000

150,000

Suppose further that the marginal and average costs of Frisbee production for every competitive firm are

Rate of Output

100

200

300

400

500

600

Marginal Cost

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

Average Cost

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

Finally, assume that the equilibrium market price is $5 per Frisbee.

(a) How many Frisbees are being sold in equilibrium?

(b) How many (identical) firms are initially producing Frisbees?

(c) How much profit is the typical firm making?

(d) In view of the profits being made, more firms will want to get into Frisbee production. In the long run, these new firms will shift the market supply curve to the right and push the price down to average total cost, thereby eliminating profits. At what equilibrium price are all profits eliminated? How many firms will be producing Frisbees at this price?