In: Economics
A firm is considering entering a market where demand for its product is Q = 100 - P. This demand function implies that the firm’s marginal revenue function is MR = 100 - 2Q. The firm’s total cost of producing the product for that market is TC = 860 + 20Q + Q2 which indicates that its marginal cost function is MC = 20 + 2Q. Calculate the firm’s profit and hence indicate whether or not the firm should enter the market. Also represent your findings on an appropriate graph.
ANSWER:-
Here firm's equilibrium condition is MR = MC.
=> 100 - 2Q = 20 + 2Q
=> 100 - 20 = 2Q + 2Q
=> 80 = 4Q
=> Q = 80 / 4
Q = 20
From demand function, we get
Q = 100 - P
=> 20 = 100 - P
=> P = 100 - 20
P = 80
TR (Total Revenue) = P * Q = 80 * 20
TR = 1600
TC = 860 + (20 * 20) + (20)^2
=860+400+400
TC = 1660
Profit = TR - TC
= 1600 - 1660
Profit = - 60
Here the firm faces loss of $60. As here the firm face loss, hence the firm should not enter into the market.
The above findings are shown by the following picture's diagram.
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