Beta Industries manufactures thumb drives that consumers perceive as identical t
ID: 1104996 • Letter: B
Question
Beta Industries manufactures thumb drives that consumers perceive as identical to those
produced by numerous other manufacturers. Recently, Beta hired an econometrician to estimate
its cost function for producing boxes of one dozen thumb drives. The estimated cost function is C=20+2Q2
a. What are the firm’s fixed costs?
b. What is the firm’s marginal cost?
Now suppose other firms in the market sell the product at a price of $10.
c. How much should this firm charge for the product?
d. What is the optimal level of output to maximize profits?
e. How much profit will be earned?
f. In the long run, should this firm continue to operate or shut down? Why?
Explanation / Answer
a. The firms fixed costs are 20.
b. The firms marginal cost is the first derivative of total cost which here is MC=4Q. Thus marginal costs are 4Q.
c. As there is no product differentiation, the market is competitive and so Beta will also charge $10 for its product. The demand curve is horizontal.
d. Optimum output is where P=MC, so 10-4Q. So output must be Q=3.
e. Profit is total revenue - total costs = 30-38=-8.
f. In the long run the firm should shut down as its not making even normal profits. As its making losses the firm should shut down.
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