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Chapter9

1. Given : Market Demand Function for Pizza QD = 10,000-1000P Market Supply Function for Pizza QS = -2000 + 1000P Solution a) Equilibrium price is obtained when QD =QS

i.e., 10,000-1000P= -2000 + 1000P 2000 P = 12000 P = 6 -----------> (1) Equilibrium Price = $6 Substituting equation 1 into QD = 10,000-1000P, we get QD = 4000 Therefore Equilibrium Quantity = 4000 b)

3) a) When P = $18, the best level of output is given by point Ait is equal to 7000. The corresponding ATC (Average Total Cost) is equal to $14 given by point N. Profit per unit of the firm = P ATC = $18- $14 = $4 Total Profit of the firm = $4*7000 = $28000 This is the maximum profit that the firm can make at this price.

b) When P= $13, the best level of output is given by point B. It is equal to 6000.At this point the firm breaks even.

c) When P = $9, the best level of output is given by point C. It is equal to 5000. The corresponding ATC (Average Total Cost) is equal to $14 given by point N. The firm incurs a loss Loss per unit of the firm = ATC P = $14 -$9 = $5 Total Loss of the firm = $5 * 5000 = $25000 If the firm tries to go out of the business, Loss per unit of the firm = TFC (Total Fixed Cost) per unit of the firm (given by DE) = $14-$6=$8 Total Loss to the firm = Total Fixed Cost = $8*5000 = $40000 Therefore in the short run the firm would try to minimize its loss by staying in business. d) When P=$5, the best level of output is given by point F. It is equal to 4000. Point F is the shutdown point because whether the firm produces or not, it would incur a short run loss equal to its TFC =$40000

e) When P=$3, the firms Total Revenue = 3000*$3 (given by point G). TVC of the firm at Point G = $6*3000 =$18000 Since P is smaller than AVC, Total Loss to the firm if it stays in business = TFC + Amount by which TVC exceeds Total Revenue = $40000 + $18000 - $9000 = $49000 Thus it pays for the firm to shut down and minimize it total losses at its TFC ($40000) in the short run.