Question

In: Economics

Suppose that a competitive firm's marginal cost of producing output q is given by MC(q) =...

Suppose that a competitive firm's marginal cost of producing output q is given by MC(q) = 3+2q. Assume that the market price of the firm's product is $9.

  1. (a) What level of output will the firm produce?

  2. (b) Suppose that the average variable cost of this firm is given by AV C(q) = 3 + q. Suppose that the firm's fixed costs are known to be $3. Will the firm be earning a positive, negative, or zero profit in the short run? Show your result on a graph.

Solutions

Expert Solution

a)

Given that,

MC = 3 +2q

P = 9

In competitive equilibrium condition,

P = MC

9 = 3 + 2q

2q = 6

q = 3
Firm will produce 3 level of output.

b)

AVC = 3+q

Fixed Cost = 3

Total Variable Cost = AVC*q = (3+q)*q

Substituting q = 3

Total Variable Cost = (3+3)*3 = 18

Total Cost = Total Variable Cost + Fixed Cost = 18 +3 = 21

Total Revenue = P*Q = 9*3 = 27

Profit = Total revenue - Total Cost = 27-21 = 6

Hence, firm will make the profit.

Below is the screenshot of the graph -

Rahul Sunny answered 1 year ago
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