Exhibit 8-1

-The perfectly competitive firewood market is composed of 1,000 identical consumers and 1,000 identical firms. Exhibit 8-1 shows cost data for one firm and demand data for one consumer. How many cords of firewood wil be bought and sold in equilibrium?

Question

Exhibit 8-1
 
-The perfectly competitive firewood market is composed of 1,000 identical consumers and 1,000 identical firms. Exhibit 8-1 shows cost data for one firm and demand data for one consumer. How many cords of firewood wil be bought and sold in equilibrium?

Quizplus · Accepted Answer

To find the equilibrium quantity, we need to compare the firm's marginal cost (MC) with the consumer's marginal benefit (MB). At a price of $20 per cord, the firm's MC is $20 and the consumer's MB is $40, so there is room for mutually beneficial trade. As the market price falls, the firm's incentive to produce and the consumer's willingness to buy both decrease. At a price of $10 per cord, the firm's MC is $10 and the consumer's MB is $20, so the equilibrium quantity is where MC = MB, or Q = 3,000 cords. At that quantity, the market price is $15, which equals both the firm's average total cost (ATC) and the consumer's average willingness to pay (AWP). Any other price would lead to either excess supply or excess demand, so the market will settle at Q = 3,000. Thus, the correct answer is C) 3,000.

Exhibit 8-1 -The Perfectly Competitive Firewood Market Is Composed of 1,000 Identical