A firm produces a product in a competitive industry and has a total cost function TC...

A firm produces a product in a competitive industry and has a total cost function TC = 50 + 4Q +2Q² and MC = 4 + 4Q. At the given market price of $20, the firm is producing 5 units of output. Is the firm maximizing profit ? What quantity of output should the firm produce in the long run?

Solutions

Expert Solution

A perfectly competitive firm produces at MC=P

equating both

4+4Q=20

4Q=16

Q=4

the firm is not maximizing production at Q=5; it should produce Q=4 units to maximize profit.

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A long run price is equal to the minimum ATC

ATC=TC/Q

ATC=50/Q+4+2Q

the ATC is minimum at MC=ATC

equating both

4+4Q=50/Q+4+2Q

2Q=50/Q

Q^2=25

Q=5

the long run quantity the firm produce is 5 units

Rahul Sunny answered 1 year ago

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