Briefly discuss a strategy a firm operating in a perfectly competitive market must take to sustain...

Briefly discuss a strategy a firm operating in a perfectly competitive market must take to sustain its profit outlook.
A firm operating in a competitive market has the following cost function C = 10 + 2Q². The market demand is Q = 40 – 2P and equilibrium price of output is $20.

Calculate the output the firm must produce to maximize its profits.
Find the price the firm must charge to maximize profits.

Solutions

Expert Solution

a. As profit maximising condition in perfect competition is MR=MC where MR is the marginal revenue and MC is the marginal cost. Now as long as Marginal revenue generated from selling an additional unit is greater than the marginal cost that firm incurs by selling an additional unit, the firm should expand production to keep on earning positive profit. Whenever MR becomes equal to MC, it gives a signal that increasing production beyond this level will cause Marginal cost to be greater than marginal revenue and firms start facing economic losses.

Rahul Sunny answered 2 weeks ago

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