# Case Study: The Price System

See the attached file for complete problem (along with data).

CHAPTER 14

THE CASE FOR FREE MARKETS I:

THE PRICE SYSTEM

ACTIVITY

Reminder: For consumers following the Optimal Purchase Rule: MU=P.

Use the Q of chairs and the P (MU) as the Demand Schedule.

For firms under conditions of perfect competition, P=MR

To maximize their profits, they must produce where: MR=MC.

(You have to calculate MC from Total Cost given above.)

Use the Q of chairs and the MC figures as the Supply Schedule.

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#### Solution Preview

1. a) See the attached file. The efficient level of output is where MU = MC. In this case, the efficient level of output is 5 chairs.

b) Demand schedule: P = MR = MU and Qd = number of chairs

Supply schedule: P = MC and Qs = number ...

#### Solution Summary

This solution presents mathematical analysis of a case study of the market for chairs in a community. The topics covered are:

1. Marginal utility and total cost

2. The efficient level of output

3. Market inefficiency

4. Price ceilings and price floors

Step by step calculations with explanations are provided.