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Case Study: The Price System

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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 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.

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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 ...

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