The typical industrial bakery can produce cookies at a daily long run cost of TCLR(q) = 0.01q2+900(where q is the number of packs
of cookies baked each day.
a) Suppose cookies are sold in a perfectly competitive market. What is the long run price of a pack of cookies? How many packs of
cookies does the typical bakery sell each day?
The daily demand for cookies is QD (P) = 60,000 - 4,000P.
b) In the long run, how many packs of cookies are sold each day? How many bakeries sell cookies?
c) Suppose government introduced a cookie tax of $3 per pack collected from bakeries. How would the tax affect the price of a pack of cookies in the short run? And in the long run? (Hint: Find the short run supply curve of the typical bakery and the short run market supply first).
The cookie tax is repealed, however a big food company buys all small bakeries and becomes the sole monopolist in the cookie market.
d) What is the monopolist marginal revenue function?
e) Find the monopolist profit maximizing quantity and price and the deadweight loss of the monopolist.
f) If government introduced a cookie tax of $3 per pack, by how much would the monopolist increase the price of a pack of cookies?
Suppose no tax was levied in this market but that the demand for cookies shifted to QD'(P) = 81,000 - 6,000P.
g) In the short run, would the price of a pack of cookies increased, stayed the same or dropped if the market were perfectly competitive?
h) In the short run, would the price of a pack of cookies increased, stayed the same or dropped if the market were a pure monopoly?