Parkin Economics Ch11 Questions and Solutions

loosely corresponds with Parkins, Microeconomics, ch 12

Answers to the Problems – Chapter 11

1. a. b. c. d. e. Lin is operating in a perfectly competitive market. The equilibrium price is determined by the equilibrium between the market demand and the market supply. Lin’s marginal revenue equals the market price for a box of cookies. Lin will sell no boxes of fortune cookies. All buyers will want to buy Lin’s cookies. so the demand for Lin’s cookies is essentially infinite. More realistically, Lin would probably sell the quantity that maximizes his profit but that profit will be less than if he sells at the going market price of $10 a box. The elasticity of demand for Lin’s cookies is infinite. The elasticity of demand in the market for cookies is not infinite. Quick Copy’s marginal revenue equals the market price so it is 10 cents per page. Quick Copy’s profit-maximizing quantity is 80 pages an hour. Quick Copy maximizes its profit by producing the quantity at which marginal revenue equals marginal cost. In perfect competition, marginal revenue equals price, which is 10 cents a page. Marginal cost is 10 cents when Quick Copy produces 80 pages an hour. Quick Copy’s economic profit is $2.40 an hour. Economic profit equals total revenue minus total cost. Total revenue equals $8.00 an hour (10 cents a page multiplied by 80 pages). The average total cost of producing 80 pages is 7 cents a page, so total cost equals $5.60 an hour (7 cents multiplied by 80 pages). So economic profit equals $8.00 minus $5.60, which is $2.40 an hour. (i) At $14 a pizza, Pat’s profit-maximizing output is 4 pizzas an hour and economic profit is $10 an hour. Pat’s maximizes its profit by producing the quantity at which marginal revenue equals marginal cost. In perfect competition, marginal revenue equals price, which is $14 a pizza. Marginal cost is the change in total cost when output is increased by 1 pizza an hour. The marginal cost of increasing output from 3 to 4 pizzas an hour is $13...