Question

In: Economics

1. In a perfectly competitive market, market demand is QD = 110 - 16P and market...

1. In a perfectly competitive market, market demand is QD = 110 - 16P and market supply is QS = 5P - 58. The representative firm has total cost TC = 250 - 0.4q + 0.1q2 and its marginal cost is MC = 0.2q – 0.4a.What is the market equilibrium price?

b.What will this firm’s profit maximizing level of output be at this price?

c.What will this firm’s profits be?

d.Should this firm shutdown in the short run? Explain.

e.This industry is not in a long run equilibrium. How do you know from the information provided?

f.Would there more likely be entry into this industry, exit from the industry, or no change in the number of firms in the long run?

Solutions

Expert Solution

A.

Equilibrium price is when demand equals supply.

Demand =supply

110-16P=5P-58

110+58=5P+16P

168=21P

168/21=P

8=P

B.

Firm maximises it's profit where MR equals MC and in perfect competition price is equals to MR.

Price =MC

8=0.2q-0.4

8+0.4=0.2q

8.4=0.2q

8.4/0.2=q

42=q.

C.

Profit =TR-TC

=336-409.6

=-73.6

TC = 250 - 0.4q + 0.1q2

=250-0.4(42)+0.1(42)^2

=250-16.8+176.4

=409.6

TR =price *quantity

=8*42

=336.

D.

VC =TC-FC

=409.6-250

=159.6

When total revenue is greater than variable cost, firm should produce to minimise loss.

So firm will produce in short run.

E.

In total cost, 250 is fixed cost.

In short run at least one cost is fixed and in long run all cost are variable. So here there is fixed cost, that's why we can say that firm is in short run. Also, when firm is in short run it earns negative or positive economic profit but in long run all firms earn zero economic profit.

F.

Exit from the industry.

Explanation :

When there is negative profit in the market, existing firms will exit the industry.


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