A firm sells its product in a perfectly competitive market where other firms cha
ID: 1193747 • Letter: A
Question
A firm sells its product in a perfectly competitive market where other firms charge a price of $110 per unit. The firm’s total costs are C(Q) = 50 + 10Q + 2Q2.
a. How much output should the firm produce in the short run?
b. What price should the firm charge in the short run?
c. What are the firm’s short-run profits?
d. What adjustments should be anticipated in the long run?
No firms will enter or exit at these profits.
Exit will occur since these economic profits are too low.
Entry will occur until economic profits shrink to zero.
Explanation / Answer
C = 50 + 10Q + 2Q2
MC = dC / dQ = 10 + 4Q
(a) A competitive firm will maximize profits by equating price with MC.
10 + 4Q = 110
4Q = 100
Q = 25
(b) In short run, firm's price will equal market price of $110.
(c)
Profit = P x Q - C
= $(110 x 25) - $[50 + (10 x 25) + (2 x 25 x 25)]
= $(2,750 - 1,550)
= $1,200
(d) Attracted by this excess profit, other firms will enter the market which will erode the profit in long run, when firms will earn only the normal profit, but no excess (economic) profit.
3rd option is correct.
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