25) Suppose C = 10 + 0.1Q2 . If p*=10 and there are 100 identical firms in a com
ID: 1108133 • Letter: 2
Question
25) Suppose C = 10 + 0.1Q2 . If p*=10 and there are 100 identical firms in a competitive market, the market supply will
be
A) 2400.
B) 2500.
C) 24000.
D) None of the above.
26) Suppose that once a well is dug, water flows out of it continuously without any additional effort. Customers collect
their water and pay a per gallon fee when they leave the site of the well. In the short run, the competitive firm in this
market
A) has no variable costs.
B) has no fixed costs.
C) will shut down.
D) can produce water at no cost.
27) In deciding whether to operate in the short run, the firm must be concerned with the relationship between price of
the output and
A) total cost.
B) average variable cost.
C) total fixed cost.
D) the number of buyers.
The answer for 25 is D, the answer for 26 is A, The answer for 27 is B. Could someone explain to me why these are the answers and show the steps. Thank you!
Explanation / Answer
(25) C = 10 + 0.1Q2. So MC=dC/dQ=0.2Q
P=10, For prfot maximization each firm will set P=MC.
10=0.2Q thus Q=10/0.2=50. This is the profit maximizing output of a single firm. There are 100 such identical firms. SO the total output of all the firms TQ=100*50=5000
So the correct answer is (D)
(26) Cost of digging the well is a fixed cost because it does not depend on how much water is being produced. Water flows out of the well continuously without any additional effort means that it costs nothing to the firm to produce each unit of water apart from the fixed cost. Variable cost is the cost which shows how costs change as output changes. But here there is no such cost. So the correct option is (B).
(27) When a firm starts production in the short run it has to incurr some fixed cost which is independent of the fact whether the firm produces zero or poistive output. If the price of the output is greater than the average variable cost, then the firm is able to cover the varaible cost as well as some of its fixed cost. When price of the output is less than the average variable cost then the firm is not able to cover fixed cost and also suffers additional losses because of production. If the firms stops production at the price below average variable cost, then it will not have to suffer additional losses and its loss will just be equal to the fixed cost. Thus the decision of the firm whether to shut down or not depends on whether its price is less than or greater than the average variable cost.
Thus correct option is (b)
Hope this helps. Feel free to ask for further clarifications in the comment section and kindly do rate the answer. Cheers!
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