Question

In: Economics

A perfect competitive firm faces the total cost TC=150+2q2. a. If the market price p=80, how...

A perfect competitive firm faces the total cost TC=150+2q².

a. If the market price p=80, how much output will the firm produce?

b. At p=80, what is the firm’s profit?

c. Find the quantity of output for which marginal cost equals average variable cost. What does the information tell you about the firm’s decision about whether to shut down?

Expert Solution

Marginal cost (MC) = dTC/dq = 4q

(a) A perfect competitor will equate price with MC.

4q = 80

q = 20

(b) When q = 20 and p = 80,

Revenue (TR) = pq = 80 x 20 = 1600

TC = 150 + (2 x 20 x 20) = 150 + 800 = 950

Profit = TR - TC = 1600 - 950 = 650

(c) Total variable cost (TVC) = 2q²

Average variable cost (AVC) = TVC/q = 2q

When MC = AVC,

4q = 2q

This relationship will hold only when q = 0.

Therefore, AVC is minimum when output is zero, implying that the firm will supply any positive amount of output.

Rahul Sunny answered 2 years ago

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