Question

Suppose that the flu vaccination industry is perfectly competitive and that Healthy Times Inc. is a representative firm who is just one of many flu vaccination producers in the industry. For all calculation questions, please include the number only in your submitted solutions (don’t use any dollar signs, symbols, commas, decimal points, or letters). The current market price for a flu vaccination is $200 and Healthy Times Inc. currently faces the following cost conditions:

TC = q² + 180q + 50

MC = 2q + 180

ATC = q + 180 + 50/q

1. (4 points) Using the profit maximizing rule, how many units of flu vaccinations should Healthy Times Inc. produce according to this rule?

2. (4 points) Calculate the economic profit or loss made by Healthy Times Inc. when following the profit maximizing rule.

3. (4 points) Is the market currently in long-run equilibrium? Why or why not? What do you expect to happen in this market in the long-run?

4. (2 points) How many firms are currently in the flu vaccination market?

Answer 1

Part A.

TC = q^2 + 180q + 50 (given total cost function)

MC = 2q + 180 (given marginal cost function, is also first order derivative of TC function)

ATC = q + 180 + 50/q (given average cost function, ATC=TC/q)

TR = 200*q

MR = dTR/dQ = 200

Profit max rule is the point where MR=MC

2q+180=200

2q = 20

q* = 10 units

at q=10, ATC = 10+180+50/10 = 195

Part B.

Profit/Loss = (P-ATC)*Q

Profit/Loss = (200-195)*10 = 50 (Positive economic profits)

Part C.

The market is NOT in the long run as the firms are earning positive economic profits. In the long run the firms earn only normal profits and ZERO economic profits. In the long run the price equals the average total cost of production. In this market, in the long run, new firms will enter. This will lead to increase in supply which will bring down the price to the extent that it is equal to the average total costs. This happens till there are no economic profits in the industry for any firm.

Part D.

The industry demand curve is not mentioned.