General Economics : Suppose that the monthly market demand schedule
General Economics : Suppose that the monthly market demand schedule
Subject: Economics   / General Economics
Question
Suppose that the monthly market demand schedule for Frisbees is:
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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?