O $40 D None of the above. QUESTION 21 Assume a competitive firm faces a market

Question

O $40 D None of the above. QUESTION 21 Assume a competitive firm faces a market price of $90. The total cost of the firm is given by the cost curve C- Q3 +9Q + 1250. Which of the following is true in the short-run situation? Hint: First calculate the profit-maximizing quantity and price, and then calculate the profit. If the profit is a negative number O The firm makes profit of more than $500 O The firm makes a loss of $764 and should shut down O The firm breaks even The firm makes a loss of $764 and should not shut down O None of the above Click Save and Submit to save and submit. Click Save All Answers to save all ansuwers

Explanation / Answer

MR = P = $90 (in competitive market)

MC (by differentiating C equation) = (Q2 + 9)

At equilibrium MC = MR => 90 = (Q2 + 9) => Q = 9

TR = (90 * 9) = $ 810; TC = (243 + 81 + 1250) = $1574

Profit = TR - TC = - $764 (loss)

Now from C we can see that the VC = ( Q3/ 3 + 9Q)

So AVC = (Q3/ 3 + 9Q) / Q = (Q2/ 3 + 9)

Now at Q = 9, AVC = 36.

Since, P >= AVC the firm should not shut down.

The firm makes loss of $764 and should  not shut down.

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