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 $120 per unit. The firm’s total costs are C(Q) = 60 + 8Q + 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.

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

-No firms will enter or exit at these profits

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

-No firms will enter or exit at these profits

Explanation / Answer

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

Where MC = Price.

MC = 8 + 4Q = 120

4Q = 120 - 8 = 112

Q = 112/4 = 28

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

Prices are given as $120 (all firms have the same price)

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

Profit = Total Revenue - Total Cost

Profit = Price * Quantity - TC

Profit = 120*28 - (60 + 8(28) + 2(28)(28))

Profit = 3360 - (60 + 224 + 1568)

Profit = 3360 - 1852 = 1508

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

In long run, Entry will occur until economic profits shrink to zero

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