Question

a small nation has three gasoline suppliers with a linear monthly market demand equal to Q=500,000 -5p. Each firm's marginal cost (MC) and average total cost (ATC) curves are horizontal at $10,000 per month. What is the If the firms compete how much do each of the firms earn in profit?

Answer 1

We have the following information

Market Demand: Q = 500,000 – 5P or P = 100,000 – 0.2Q

Q = Output

P = Market price

For equilibrium a firm needs to equate its marginal cost (MC) with the market price

MC = 10,000 (given)

P = MC

100,000 – 0.2Q = 10,000

90,000 = 0.2Q

Total Output (Q) = 450,000

Market price: P = 100,000 – 0.2Q

P = 100,000 – 90,000

Market Price (P) = $10,000

Since, all the three firms have identical marginal and average total cost, so the total output will be equally distributed among the firms.

So, each firm will produce: 450,000/3 = 150,000

Profit = Total Revenue – Total Cost

Total Revenue = Price × Output

Total Revenue = 10,000 × 150,000

Total Revenue of a Firm = 1,500,000,000

Total Cost = ʃMC = ʃ10,000 = 10,000Q

Total Cost = 10,000 × 150,000

Total Cost = 1,500,000,000

So,

Profit = 1,500,000,000 – 1,500,000,000

So, each firm will earn zero profit.