Chapter 12, Problem 1SPA

To determine

What is the type of market that Lin operates and what determines the price of the cookies and marginal revenue of Lin.

Explanation of Solution

The market where there are many buyers and sellers of the uniform commodities and each one with the complete market knowledge and complete freedom of entry and exit into the market is known as the perfect competition. Here in the case of Lin, he operates in a market where there are many producers and all produce the very same commodity, which is here, the cookie. Anyone can enter or exit from the market at any time, which means there are no barriers to entry and exit from the market. These indicates that the market that Lin operates has the characteristics of perfectly competitive market.

The price is determined at the point of equilibrium between the market demand curve and the market supply curve. The market demand curve is the summation of all the individual demand curves of the market whereas the market supply curve is the summation of the individual supply curves in the market. Thus, the price level of the market is determined at the intersection of the market demand and supply curves. It is known as the equilibrium price because at this price, there will be no excess or shortage of supply or demand in the market.

The perfectly competitive market has a condition that determines the efficiency maximizing level and it is the level at which the price equals marginal cost equals marginal revenue. Thus, MR equals MC equals Price under perfect competition. The marginal revenue is the additional revenue generated through the sale of an additional unit of commodity in the market. Since the MR = MC = P under perfect competition, the marginal revenue of Lin is determined by the price level in the market.

Economics Concept Introduction

Market: Market is a place where the prospective buyers and sellers interact with each other and the exchange of goods and services takes place between the seller and the buyer at a mutually agreed price level.

Perfect competition: Perfect competition is a market condition where there are a large number of buyers and sellers in the market, perfect knowledge of the market to the buyers and sellers, uniform commodities, and there is freedom of entry and exit in the market.