Question

Consider that Just Desserts is a firm currently operating in a perfectly competitive market. All firms in this market have identical cost structures and Just Desserts’ cost structure is described by the following equations:

  

ATC = 4500/q + 5q

MC = 10q

AVC = 5q

4. Given Just Desserts’ cost structure, the firm will earn an economic profit (profit greater than zero) if the market price is ______ (equal to|greater than | less than | not equal to) $_________.

Answer 1

Given data:

· Just Desserts is a firm currently operating in a perfectly competitive market.

· All firms in this market have identical cost structures

· Just Desserts cost structure is described by the following equations:

ATC = 4500/q + 5q

MC = 10q

AVC = 5q

4. Just Desserts’ cost structure, the firm will earn an economic profit:

                            Given that the firm’s MC is 10Q and in a competitive market P = MC always holds, let’s taken an arbitrary price P.

P = Q (P = MC)

è Q = P/10

Substitute this into the equation for profit:

Profit = Total revenue minus total cost

            = (P*Q) – (ATC*Q)

            = [P*(P/10)] – [4500/(P/10) + 5*(P/10)]*(P/10)

We have to calculate a price P such that the above expression is greater than or equal to zero

Solving,

è [X*(X/10)] – [4500/(X/10) + 5*(X/10)]*(X/10) = 0

è P = 300

The firm will earn economic profits if the price is equal to or above 300.