Suppose that the monthly market demend 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?