Question

Leila runs a firm in a perfectly competitive market with many other firms. Her short-run cost function is given by C(q) = q2 + 25q + 144 such that MC(q) = 2q + 25. Answer the following questions.

a. How much is Leila’s fixed cost of running the firm?

b. If the market price is $75, how much profit will Leila make?

c. Below which price will Leila need to shut down in the short-run?

d. How much output will Leila produce in the long-run? What will the market price be in the longrun?

please include steps or explanations

Answer 1

The profit of a firm is given as

Here AC is average cost, P is the price and Q is the output produced. Thus, the firm will earn above normal profit if price in greater than AC. The supernormal profit encourages entry into any industry. The firm break even at the point where P=MC=AC. This occurs where the MC cuts the AC curve.

The firm operates into an industry as long as it can cover its variable cost. This is because, when the firm is losing money in every unit it produces, this means that every additional unit the firm produces is incurring loss. Therefore, the cost of additional unit of production is greater than the revenue from additional unit. Hence, marginal revenue is less than the marginal cost. On the other hand, if firm sells additional unit then its total revenue will be just enough to cover its variable cost the cost which is increasing and varies with output. If in this stage the firm quit production it will still have to pay the fixed costs. With no revenue, this will prove unprofitable for the firm. On the other hand, if it continues its production it will be able to cover its variable costs, so can incur smaller losses than to close down. If the price falls below average variable cost, it will not be able to cover its variable cost by additional revenue. Then it will be force to close down. Then the shutdown point is P=min AVC.