Modern Principles of Economics
Modern Principles of Economics
3rd Edition
ISBN: 9781429278393
Author: Tyler Cowen, Alex Tabarrok
Publisher: Worth Publishers
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Chapter 8, Problem 1FT
To determine

Eliminate shortage in free market.

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Explanation of Solution

A free market eliminates shortage by letting the price rise. By this way, it tends to reduce the demand for a good or service while increasing the supply, thereby eliminating shortage.

Economics Concept Introduction

Concept Introduction:

Free market: Free market is an economic system in which prices of goods and services are determined by the open market and consumers, that is demand and supply is based on no or little government control.

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The accompanying graph shows the short-run demand and cost situation for a price searcher in a market with low barriers to entry. Price (dollars) 24 8 MC ATC MR 30 D 45 50 Quantity/time The firm will maximize its profit at a quantity of units. After choosing the profit maximizing quantity, the firm will charge a price of The firm will receive $ in revenue at the profit-maximizing quantity. The total cost of production for this profit-maximizing quantity is S The maximum profit the firm can earn in this situation is $ per unit for this output. How will the situation change over time? Profits will attract rival firms into the market until the profit-maximizing price falls to the level of per-unit cost. ◇ Losses will induce firms to leave this market until the profit maximizing price falls to zero. The market will adjust until the price charged by this firm no longer exceeds marginal cost at the profit-maximizing quantity. This market is already in long-run equilibrium, and will not…
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