You are on page 1of 3

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.