6) Assume that the market for chocolate cake (everyone loves chocolate cake!) is perfectly competitive and that the market demand for a slice of chocolate cake is given by QD = 450 - 3P, while the market supply of chocolate cake slices is given by Q3 = 300 + 2P. a) What is the market equilibrium price for a slice of chocolate cake? b) Kwame wants to sell chocolate cake. He has a marginal cost curve of MC(q) = 14 + q, where q is the number of slices of chocolate cake produced by Kwame. What is his marginal revenue for each slice of cake? How many slices of chocolate cake will she make given the equilibrium price? c) Kwame's xed cost in order to set up the business is $100. His variable costs are VC(q)= 149+ 1/2 q2_ Draw out Kwame's Average Total Cost, Average Variable Cost and Marginal Cost curves. Does he make a prot given this market price? If so, how much prot does he make? If not, how much does he lose? (1) If market demand changes and becomes QD' = 475 - 3P, does Kwame make more or less chocolate cake? Why? How many slices does he make? What is the price elasticity of supply for Kwame when moving from the price in part a) to this new market price? What are his new prots? e) If Kwame's Fixed Cost increases to $600, what happens to his prot at the new market demand level. Will he continue to make chocolate cake? Explain. f) Suppose Kwame's Fixed Cost stays at $100 and market demand is at QD'. Kristen, Keizen, Kayvan and Kaavya see Kwame making so much money. They all have similar cost curves and also want to make chocolate cake. What will happen to the market supply curve? What will happen to the market price and Kwame's prots? 4) Shamsudin has a business cutting wood. He needs to choose one kind of saw to run the business every week and this is his xed input in the short run. In the long run, he can choose a pruning saw, bow saw, or a chain saw which have different xed costs (F C). If he saws using the pruning saw it takes a lot of man hours, variable cost (V C). If he uses the chain saw it takes less man hours. The following table shows the short-run xed cost (F C) and variable cost (V C) of weekly production using each different level of the capital input. Pieces F C ($) VC ($) FC ($) VC ($) FC ($) VC ($) of wood pruning saw pruning saw bow saw bow saw chain saw chain saw mu n-----n mm mm a) If Shamsudin plans to cut 20 pieces of wood this week, which type of capital input (pruning saw, bow saw or chain saw) should he choose? If he wants to cut 120 pieces of wood per week, which level of capital input should he choose? If he wants to saw 480 pieces of wood per week? b) Draw out the short-run average total cost curve for a pruning saw. On the same graph draw out the average total cost curve for a bow saw and chain saw. c) What does the long-run average total cost curve look like for Shamsudin's rm? Graph it 8) Lyme Disease is a big issue in Long Island, NY where the disease is spread by ticks which live on deer. Shakil and Cecilia live in a small community in Long Island, and they are the only individuals in the community. Each would like some amount of tick control, as indicated by the below equations. Tick control is provided at a constant marginal cost of $25. Cecilia's demand: QDC = 80 p Shakil's demand: QDS = 190 2 p a) Draw out the demand curves Cecilia and Shakil. If tick control is a private good, what is the market demand curve? Draw out the market demand curve assuming tick control is a private good. What is the equilibrium price and quantity of tick control? b) The Council of their community declares that tick control is a public good. Explain why that might be the case. How would total demand for this public good now look different? Draw out total demand assuming tick control is a public good. c) Calculate the inverse demand curves for Cecilia and Shakil. Why do these describe their demand for the public good? (1) The Council decides that since tick control is a public good, it will provide the service If they know Cecilia and Shakil's demand curves, how much tick control will the government provide? How does this compare to the private outcome? Why are they different