A firm sells its product in a perfectly competitive market where other firms cha

Question

A firm sells its product in a perfectly competitive market where other firms charge a price of $100 per unit. The firm’s total costs are C(Q) = 50 + 12Q + 2Q2.

a. How much output should the firm produce in the short run? in units

b. What price should the firm charge in the short run? in $

c. What are the firm’s short-run profits? in $

d. What adjustments should be anticipated in the long run?

a. No firms will enter or exit at these profits.

b. Exit will occur since these economic profits are too low.

c. Entry will occur until economic profits shrink to zero.

Explanation / Answer

a) Under perfect competition, equilibrium condition is P = MC

100 = 12 + 4Q

4Q = 88

Q = 22 units

b) P = 100 remains fixed under perfectly competitive market.

c) Profit = TR - TC = PQ - 50 - 12Q - 2Q2 = 100 x 22 - 50 - 12(22) - 2(22)2 = 2200 - 50 - 264 - 968 = $ 918

d) c. Entry will occur until economic profits shrink to zero.

Positive profit induces firms to enter into the market. This process continues until profit reduces to zero.

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