ui 1 (15 points). Assume that each competitive firm in an industry has the short
ID: 1122814 • Letter: U
Question
ui 1 (15 points). Assume that each competitive firm in an industry has the short-run cost function C - 50+5q+q2, the market price is $35, and the fixed costs are sunk cost in the short run. (7 points) what is the profit-maximizing output level for each firm? What is the total revenue? What are the profits? (8 points) Suppose, in the question above, that fixed costs were $250 instead of $50. How does this change affect the firm's output decision and profits? Should the firm continue to operate? a. b.Explanation / Answer
a). i). Solution :- C = 50 + 5q + q2 (Total cost function)
MC = 5 + 2q (Marginal cost function is the first derivative of total cost function.)
P = $ 35 (Given in the question)
The firm will maximize profits by producing at that level of output where the Price (P) equals to the Marginal Cost (MC).
Equating P and MC in the given question,
35 = 5 + 2q
35 - 5 = 2q
30 = 2q
q = 30 / 2
q = 15.
Conclusion :- Profit-maximizing level of output for the firm in an industry = 15 units.
a). ii). Solution :- Total revenue = Price * Quantity.
= 35 * 15
= $ 525.
Total cost = 50 + 5 * 15 + (15)2 (Put the value of q = 15 in the total cost function given in the question)
= 50 + 75 + 225
= $ 350.
Profits = Total revenue - Total cost.
= 525 - 350
= $ 175.
Conclusion :-
Total revenue of the firm $ 525 Profit of the firm $ 175Related Questions
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