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1. Price and output in a competitive price-searcher market Consider a pricesearching rm, Tim's Fire Engines, which sells fire engines in the ctional country of
1. Price and output in a competitive price-searcher market Consider a pricesearching rm, Tim's Fire Engines, which sells fire engines in the ctional country of Pyrotania. Initially, Tim's produced four fire engines but then decided to increase production to five fire engines. The following graph shows the demand curve the firm faces. To sell the additional engine, Tim's must lower its price from $105,000 to $90,000 per engine. (Hint: Tim's Fire Engines gains revenue from the additional engine it sells, but it also loses revenue from the initial four engines because it sells them all at the lower price.) On the following graph, use the purple rectangle (diamond symbols) to shade the area representing the revenue lost from the initial four engines by selling at $90,000 rather than $105,000. Then use the green rectangle (triangle symbols) to shade the area representing the revenue gained from selling an additional engine at $90,000. 150 135 Revenue Lost 120 Demand 105 90 Revenue Gained 75 PRICE (Thousands of dollars per fire engine) 60 45 30 15 3 5 6 7 8 9 10 QUANTITY (Fire engines) Tim's Fire Engines increase production from four to five fire engines because the change in dominates in this scenario. True or False: If Tim's Fire Engines were a price-taking firm instead, and $105,000 were the market price for an engine, increasing its production would not affect the price at which it could sell engines. O True O False
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