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Homework answers / question archive / The market for apple pies in the city of Ectenia is competitive and has the following demand schedule: Price ($) 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity (Pies) 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 0 Each producer in the market has a fixed cost of $9 and the following marginal cost: Marginal Cost ($) 2 4 6 8 10 12 Quantity (Pies) 1 2 3 4 5 6 (a
The market for apple pies in the city of Ectenia is competitive and has the following demand schedule:
| Price ($) | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 |
| Quantity (Pies) | 1,200 | 1,100 | 1,000 | 900 | 800 | 700 | 600 | 500 | 400 | 300 | 200 | 100 | 0 |
Each producer in the market has a fixed cost of $9 and the following marginal cost:
| Marginal Cost ($) | 2 | 4 | 6 | 8 | 10 | 12 |
| Quantity (Pies) | 1 | 2 | 3 | 4 | 5 | 6 |
(a.) Complete the following table by computing the total cost and average total cost for each quantity produced.
| Quantity (Pies) | Total Cost ($) | Average Total Cost ($) |
| 1 | ||
| 2 | ||
| 3 | ||
| 4 | ||
| 5 | ||
| 6 |
(b.) The price of a pie is now $11. How many pies are sold in the market? How may pies does each producer make? How many producers are there in the market? What profit does each producer make? Is the market in long-run equilibrium?
(c.) Suppose that in the long run there is free entry and exit. In the long-run, how much profit does each producer earn? What is the market price? How many pies are sold in the market? How many pies does each producer make? How many producers are there operating?
(a.) The completed table with total cost and average total cost added is:
| Quantity (Pies) | Total Cost ($) | Average Total Cost ($) |
| 1 | 11 | 11.00 |
| 2 | 15 | 7.50 |
| 3 | 21 | 7.00 |
| 4 | 29 | 7.25 |
| 5 | 39 | 7.80 |
| 6 | 51 | 8.50 |
(b.) With a price of $11, it can be seen from the market demand schedule that 200 pies are sold in the market. Each producer will produce the quantity determined by the intersection of his marginal revenue and marginal cost curves. With price fixed at $11 for a small perfect competitor, his marginal revenue will equal his price. From the earlier table with marginal cost, he will produce 5 pies when the marginal cost is $10. Going beyond that point to produce the sixth pie has a marginal cost of $12, which exceeds marginal revenue. With 200 pies sold in the market and each producer producing 5, there will be 40 producers in the market. Profit for each producer will be:
No, the market is not in long-run equilibrium.
(c.) Because of freedom of entry, profits are zero for a perfect competitor in the long run. Each firm will simply earn a competitive remuneration for factor inputs such as labor and capital. In long-run competitive equilibrium, each producer will produce at minimum average total cost, which is also the point where marginal cost equals average total cost. Minimum average total cost is $7.00 when each producer produces 3 pies. From the aggregate demand schedule above, at a price of $7.00, 600 pies are sold. With each producer producing 3 pies, there will be 200 producers.
