Asked by Selena Cheng on May 09, 2024
Verified
Assume the market for tortillas is perfectly competitive. The market supply and demand curves for tortillas are given as follows:
Supply curve: P = .000002Q
Demand curve: P = 11 - .00002Q
The short run marginal cost curve for a typical tortilla factory is:
MC = .1 + .0009Q
a. Determine the equilibrium price for tortillas.
b. Determine the profit maximizing short run equilibrium level of output for a tortilla factory.
c. At the level of output determined above, is the factory making a profit, breaking-even, or making a loss? Explain your answer.
d. Assuming that all of the tortilla factories are identical, how many tortilla factories are producing tortillas?
Equilibrium Price
The cost at which the demand for a product or service matches the supply, leading to equilibrium in the market.
Marginal Cost Curve
depicts how the cost of producing an additional unit of output changes as the level of production is varied, typically rising after a certain point due to inefficiencies.
Profit Maximizing
A strategy or behavior in businesses aimed at achieving the highest possible profit under given constraints.
- Compute the most favorable production level, financial gain, or shortfall using cost analysis and prevailing market rates.
- Identify the equilibrium levels of market and firm outputs, along with the financial outcomes in terms of profit or loss within a competitive market.
Verified Answer
BO
Becca OlorunfemiMay 14, 2024
Final Answer :
a.The equilibrium price is the price at which the quantity supplied equals the quantity demanded. Therefore,
.000002Q = 11 - .00002Q
Q = 500,000
P = 1
b.The profit maximizing short run equilibrium level of output for a tortilla factory is found where marginal revenue equals marginal cost. For a perfectly competitive firm, marginal revenue equals price. Therefore,
P = MC
1 = .1 + .0009Q
Q = 1,000
c.Given the information provided, it cannot be determined whether the firm is making a profit or a loss, because total cost cannot be determined from marginal cost.
d.Since Q = 500,000 and Q = 1,000, there must be 500 firms.
.000002Q = 11 - .00002Q
Q = 500,000
P = 1
b.The profit maximizing short run equilibrium level of output for a tortilla factory is found where marginal revenue equals marginal cost. For a perfectly competitive firm, marginal revenue equals price. Therefore,
P = MC
1 = .1 + .0009Q
Q = 1,000
c.Given the information provided, it cannot be determined whether the firm is making a profit or a loss, because total cost cannot be determined from marginal cost.
d.Since Q = 500,000 and Q = 1,000, there must be 500 firms.
Learning Objectives
- Compute the most favorable production level, financial gain, or shortfall using cost analysis and prevailing market rates.
- Identify the equilibrium levels of market and firm outputs, along with the financial outcomes in terms of profit or loss within a competitive market.