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 $110 per unit. The firm’s total costs are C(Q) = 70 + 14Q + 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?

-Entry will occur until economic profits shrink to zero. -No firms will enter or exit at these profits. -Exit will occur since these economic profits are too low.

Explanation / Answer

a)

firm will produce where P=MC

                       110 =dTC/dQ

110 = 14+4Q

4Q= 110-14

Q=96/4 = 24

output should the firm produce in the short run=24

b) as firm is price taker in perfectly competitive market , firm will charge the market price prevailing

P=110

c)

profits= P*Q- TC

        =110*24 -(70+(14*24)+2*(24)2)= 1082

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

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