The market for apple pies in the city of Ectenia is competitive and has the following de...

(a)

Using the formula derives Total Cost (TC) and Average Cost (AC) is as follows:

Where,

Marginal Cost is represented by MC,

Change in Total Cost is represented by and

Change in quantity is represented by .

Where,

Average Cost is represented by AC,

Total Cost is represented by TC, and

Quantity is represented by Q,

At zero level of quantity, there is no variable cost and hence total cost is equal to total fixed cost.

(b)

With price equal to \(\$ 11\), the quantity demanded is 200 pies and the quantity supplied will be 5 pies as at the equilibrium each firm produces at the point where price equals marginal cost. There will be 40 sellers in the market, which is derived by diving the quantity demanded by the quantity supplied by each firm.

$$ \begin{aligned} \text { Profit earned by each firm } &=\text { Total revenue }-\text { Total cost } \\ &=(\$ 11 \times 5)-\$ 39 \\ &=\$ 55-\$ 39 \\ &=\$ 16 \end{aligned} $$

(c)

In the long run, price must equal the average total cost.

However, in this case the price is more than the average total cost of \(\$ 7.8\) which implies that there is opportunity for a firm to enter the market and earn positive profits.

(d)

In the long run, firms will enter the market until profit is driven to zero. Hence the price must be equal to the minimum of average total cost, which is \(\$ 7\).

In the long run equilibrium each firm earns normal profit. Each producer makes 3 pies at this level.

The number of pie producers in the market \(=\frac{600}{3}\)

$$ =200 $$