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The table below shows the total variable costs faced by Frankie's Footwear for different quantities of sneakers sold. Quantity Total Variable Cost 1 $20 2 $25 3 $35 4 $50 5 $70

The table below shows the total variable costs faced by Frankie's Footwear for different quantities of sneakers sold. Quantity Total Variable Cost 1 $20 2 $25 3 $35 4 $50 5 $70

Economics: Private and Public Choice (MindTap Course List)
Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter23: Price-searcher Markets With Low Entry Barriers
Section: Chapter Questions
Problem 17CQ
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D, E nad F

The table below shows the total variable costs faced by Frankie's Footwear for different quantities of sneakers sold. Quantity 1 2 3 4 5 6 7 8 9 10 Total Variable Cost $20 $25 $35 $50 $70 $95 $125 $160 $200 $245 Frankie's Footwear sells sneakers in a perfectly competitive market with a downward sloping demand curve and and upward sloping supply curve. The market price is $33/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 sneaker is 1.4 and the cross price elasticity of demand for Good N with respect to sneakers is -0.75. Based on your answer to Part E, what will happen to the demand for sneakers? Explain. G. Now assume that the market in which Frankie's Footwear operates is in long run equilibrium at a price of $30/unit. i. Suppose annual property taxes for Frankie's Footwear increase by $2,000. Will the profit maximizing quantity of sneakers for Frankie's Footwear 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 sneakers. Will deadweight loss in the market for sneakers increase, decrease, or stay the same in the short run as a result of the price floor? Explain.
Transcribed Image Text:The table below shows the total variable costs faced by Frankie's Footwear for different quantities of sneakers sold. Quantity 1 2 3 4 5 6 7 8 9 10 Total Variable Cost $20 $25 $35 $50 $70 $95 $125 $160 $200 $245 Frankie's Footwear sells sneakers in a perfectly competitive market with a downward sloping demand curve and and upward sloping supply curve. The market price is $33/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 sneaker is 1.4 and the cross price elasticity of demand for Good N with respect to sneakers is -0.75. Based on your answer to Part E, what will happen to the demand for sneakers? Explain. G. Now assume that the market in which Frankie's Footwear operates is in long run equilibrium at a price of $30/unit. i. Suppose annual property taxes for Frankie's Footwear increase by $2,000. Will the profit maximizing quantity of sneakers for Frankie's Footwear 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 sneakers. Will deadweight loss in the market for sneakers increase, decrease, or stay the same in the short run as a result of the price floor? Explain.
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