Answered: Justin’s Jeans sells in a perfectly…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Justin’s Jeans sells in a perfectly competitive market with a downward-sloping demand curve and an upward-sloping supply curve. The market price is $33 per unit, and the total fixed cost is $30.
(a) Identify the profit-maximizing quantity. Explain using marginal analysis.
(b) Calculate the economic profit at the profit-maximizing quantity you identified in part (a). Show your work.
(c) Calculate the average fixed cost of producing 6 units. Show your work.
(d) Based on your answer to part (b), will the number of firms in the industry increase, decrease, or stay the same in the long run? Explain.
(e) Based on your answer to part (b), will the market price increase, decrease, or stay the same in the long run? Explain.
(f) The income elasticity of demand for Good M is 1.4, and the cross-price elasticity of demand for jeans with respect to the price of Good M is −0.75. Based on your answer to part (e), what will happen to the demand for jeans? Explain.
(g) Now assume that the market in which Justin’s Jeans operates is in long-run equilibrium at a price of $30 per unit.
(i) Suppose annual property taxes for Justin’s Jeans increase by $2,000. Will the profit-maximizing quantity of Good M for Justin’s Jeans increase, decrease, or stay the same in the short run? Explain.
(ii) Instead suppose the government imposes a price floor at $35 on the market for Good M. Will deadweight loss in the market for Good M increase, decrease, or stay the same in the short run as a result of the price floor? Explain.

**Practice Perfect Competition**

**FRQ 2:** The table below shows the total variable costs for Good M sold.

| Quantity | Total Variable Cost |
|----------|---------------------|
| 1 | $20 |
| 2 | $25 |
| 3 | $35 |
| 4 | $50 |
| 5 | $70 |
| 6 | $95 |
| 7 | $125 |
| 8 | $160 |
| 9 | $200 |
| 10 | $245 |

Justin’s Jeans sells in a perfectly competitive market with an upward-sloping supply curve. The market price is $33 per unit.

(a) Identify the profit-maximizing quantity. Explain using marginal analysis.

(b) Calculate the economic profit at the profit-maximizing quantity. Show your work.

(c) Calculate the average fixed cost of producing 6 units.

(d) Based on your answer to part (b), will the number of firms be the same in the long run? Explain.

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(b) Calculate the economic profit at the profit-maximizing quantity you identified in part (a). Show your work.

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