Consider the daily market for hot dogs in a small city. Suppose that this market

Question

Consider the daily market for hot dogs in a small city. Suppose that this market is in long-run competitive equilibrium with many hot dog stands in the city, each one selling the same kind of hot dogs. Therefore, each vendor is a price taker and possesses no market power. The following graph shows the demand (D) and supply (s- MC) curves in the market for hot dogs. Place the black point (plus symbol) on the graph to indicate the market price and quantity that will result from competition. Competitive Market 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 PC Outcome 0 40 80 120 160 200 240 280 320 360 400 QUANTITY (Hot dogs)

Explanation / Answer

Graph 1

The market demand and market price are given by P = MC

so Q= 200 and P = 2  

Graph 2

Profit maximising condition for monompoly

MR = MC

and MC is increasing

so Q = 120  

and p = 3 are the profit maximising quntity and price respectively

under copetitive market profit maximising quantity and price are

P = MC  

Q = 200

P = 2

so DWL = 1/2(PM - 1.5)(QC - QM) PM and QM are price and quantity Pc and Qc are price and quantity under  

competition

= 1/2(3 -1.5)(200 -120)

= 60

market price quantity

competitive 2 200

monopoly 3 120

so we can infer that , in general price lower under a competitive market and the quantity is lower under monopoly market

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