Question

1. Assume the market for tortillas is perfectly competitive. The market supply and demand curves for tortillas are given as follows: Supply curve: P = 0.20 Demand curve: P = 1100 – 20 The short-run total cost curve for a typical tortilla factory, ABC, is: TC = 500 + 10 + 4.522 a) Determine the market equilibrium price and quantity. b) Determine the profit-maximizing level of output for factory ABC. c) Assuming that all of the factories are identical, how many factories are producing tortillas in the short-run? d) At the level of output determined above, is the factory making a profit, breaking-even (i.e., zero profit), or making a loss? e) Should the firm operate or shut down in the short run? Why? f) What is the firm's short-run supply curve? g) Determine the producer surplus for factory ABC at the profit-maximizing level of output. h) Referring to your answer to part (d), if entry and exit are free, explain how the market reaches to its long-run equilibrium.

Answer 1

Market Demand P=1100 -Ra Supply P=0. 22 Market Equilibrium Das 1100-2Q=0.20 1100 =0.2Q+20 1100 = 2.2 Q Q = lloo 2.2 Q = Soo units. substituting a into Demand equation P = 1100-2 (500) =loo-1000 - $100 TC = Soo HoQ +4.5Q? MC=dTC da = 0 +10(1) +92 MC = 10+qa Bofit-maxinising condition of profectly competitive firm ABC

P-MC 11oo - 20 = 10 +9Q 100-10 9Q + 20 1090=11Q Q = 1090 11 (ABC output) a=99.09 units. Namber of factories in short-sun = Total market output output of ABC firm Soo 99.og - siou firmu It means there are s firms in short-run At Q = 99.09 TC = Soo H10 (99609) +45 (99.09)? = 50o + 990.90 + 44,184.72 TC = us, 675.62 TR = p.a = 100* 99.09

TR = 9909 Loss = TC-TR = us, 675.62-9909 = 0 35,766.62 Makes a loss of $35,766.62 Firm ABC