Question

Assume the market for tortillas is perfectly competitive. The market supply and demand curves for tortillas are given as follows:

Supply curve: P =0.000002Q

Demand curve: P = 11 - 0.00002Q

The short run marginal cost curve for one tortilla factory is: MC = 0.0005q

The firm's average variable cost curve intersects the marginal cost at a vertical distance of 0.1 above the horizontal axis.   

a. Determine the equilibrium price for tortillas.

b. Determine the profit maximizing short run equilibrium level of output for the 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?

Answer 1

Gaming the market for for tillas is pufectly competitie. lanket supply and demand caves for tortillas are given as The market. follows cupply Cure: p=0000002Q Demand Cuvc! p = 11-0.00002Q The short run marginal cost cure for one for tilla factory jot MC = 0.00059 as Equilibrium price for for tillas will be found by sat equating supply to demand! Hace, 0.00000 2Q = 11- 0.00002Q = 0.0000 22Q = 11 3 Q = 500,000 Now equilibrum price for tortillas will be found by substituting Q = 500,000 in either demand or supply equation P= 0.00000 2Q =) P=$(0.00 000 2 x 500,00) =$ 1 Huce Scanned with CamScanner

62 Now, Protit Manimising Short ren equilibrium levo of output for the for tilla factory will will be found by the condition P= MC of out to - Now 0.00054 = 1 ) q= 2,000 .units at I both side Now MC = 0.0005q - We know me = d e where (= cost to of the factory aj Huces dc 0.070 sq =) de = 0.000sq de 1. =) (de= 0.000 sq dq [to Integrating a) C- 0.000sqz =) = 0.00025 q2 Now Profit of the fa dory will be T= To tal revene (PXQ) - Total cost (e) -> TT= (1 x 2,00) - [0.08025 X (2000)2) = 0 - $ (2000- lond) $ 4.000 - Hunce the factory making a profit of $4.000. d Now we know to tal market demand for ton tillas are Q = 500,000 and each factory produces caso q = 2,000 mits. Hace & nt numbu of factorin -actorio Scanked with tillas will be Producing to 500, 620 2,000