Question

Q	0	1	2	3	4	5	6	7	8
TC	10	18	24	30	38	50	66	91	120
AC		18	12	10	9.5	10	11	13	15
MC		8	6	6	8	12	16	25	29
TR		16	32	48	64	80	96	112	128
MR		16	16	16	16	16	16	16	16

A perfectly competitive TV production firm in Lost Angeles faces the above short-run cost schedule.
The price per unit of output is £16.

a) How much (supernormal) profit is made at this output?
b) What would happen to the price in the long run if this firm were typical of others in the industry?   
c) What would happen to costs and revenues if the Canadian government intervened in this market to encourage firms to move production to Vancouver, Canada?  
d) While television production is up, the US television station industry is collapsing thanks to the internet and Netflix. To what extend should government intervene in the markets prone to market failure?

Answer 1

a)

The perfectly competitive firm maximizes profit by producing at the point where P=MR=MC. At the market price of 16, the equilibrium occurs where MC=MR=16. From the table above this occurs at Q=6. At this level profit of the firm is

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b)

As each firm is identical, at this price the firm will earn positive economic profit. In the long run many firm will enter the firm and drive the price down, reducing profit. The price will continue to fall until each firm earn zero profit. Therefore, in the long run, P=MC=ATC.

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c)

If the government forces the firm to relocate in other country, this could incur additional cost of rellocation. This will increase cost of the firms and decrease firms profit. Each firm will produce less and the total revneue of the firm would fall.

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d)

If the market is subject to failure, the government should intevein to correct the market failure. But the failing of television industry is due to lack of demand, the government subsidy in this case would be of no help to increase the demand. The government cannot help the industry indefinitely in face of falling demand. Ift should provide subsidy as long as there will be cance of recovering to a stable state by the industry.