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 $90 per unit. The firm's total costs are C(Q) = 60 + 14 Q + 2Q^2. How much output should the firm produce in the short run? What price should the firm charge in the short run? What are the firm's short-run profits? 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

a. MR = P = $90

    MC = 14 + 4Q

For equilibriom, condition is MR = MC

14 + 4Q = 90

=> 4Q = 76

=> Q = 76/4 = 19 units

b. Price = $90

c. Profit = TR - TC = P*Q - (60 + 14Q + 2Q2)

             = ($90*19) - 60 - (14*19) - 2(19)2 = 1710 - 60 - 266 - 722 = $662

d. entry will occur until economic profit shrinks to zero

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