Question

. Jill’s Jelly Beans is one of many stores in town that sells jellybeans. Jill faces a perfectly elastic demand curve for her jellybeans. Use the information in the tables below to answer the following questions.

THE JELLYBEAN MARKET				JILL’S PRODUCTION COSTS
Price	Quantity Supplied	Quantity Demanded		Bags of Jellybeans	Total Cost
$10	190	50		0	$0.50
$9	180	60		1	$1.50
$8	170	70		2	$2.25
$7	160	80		3	$3.25
$6	150	90		4	$4.75
$5	140	100		5	$7.00
$4	130	110		6	$10.00
$3	120	120		7	$13.75
$2	110	130		8	$18.25
$1	100	140		9	$23.50
$0	90	150		10	$29.50

A) How many bags of jellybeans will Jill produce?

B) Calculate Jill’s economic profits given your answer from part A.

C) Draw a graph illustrating Jill’s situation. Be sure to include Jill’s demand, average cost, and marginal cost curves. Indicate on your graph Jill’s current economic profits.

D) Do new firms have any incentive to enter the market? How do you know this?

E) If Jill, given her current cost structure, remains in the market in the long-run, what would the price of a bag of jellybeans be in equilibrium?

Answer 1

A) Market price determined by Qs = Qd is $3 where Qs = Qd = 120 units. At this price, MC = $3 when Jill is producing 6 bags. Hence currently it is producing 6 bags.

B) Total revenue = price x quantity = 3*6 = $18. Cost = $10. Hence profits are 18 - 10 = $8

C) Graph is provided below

D) Yes because firms like Jill are earning economic profits so it gives an encouragement to new firms to enter and earn profit by producing.

E) If Jill, given her current cost structure, remains in the market in the long-run, long run price will be the minimum of ATC. This is given at $1.08

Bags of Jellybeans	Total Cost	ATC	MC
0	0.50
1	1.50	1.50	1.00
2	2.25	1.13	0.75
3	3.25	1.08	1.00
4	4.75	1.19	1.50
5	7.00	1.40	2.25
6	10.00	1.67	3.00
7	13.75	1.96	3.75
8	18.25	2.28	4.50
9	23.50	2.61	5.25
10	29.50	2.95	6.00