Question

In a 10q + q2 and a marginal cost curve of M C = 10 + 2q if it produces a positive quantity of output q. The market price is $50. Which statement is true?

1. (a) Each firm produces 20 units of output; the industry will require entry to reach its long-run equilibrium

2. (b) Each firm is producing 25 units; as the firm is making short-run profits the industry is not at its long-run equilibrium

3. (c) Each firm produces 20 units of output; the market is in its long-run equilibrium

4. (d) Each firm is producing 20 units; the firm will continue producing in the short run but will consider exiting in the long run as it is not covering its total costs of production

5. (e) Each firm is producing 25 units; the firm is covering its variable costs, but making a short run loss

Answer 1

A perfectly competitive firm produces at P = MC

=> 50 = 10 + 2q

=> 2q = 50 - 10

=> 2q = 40

=> q = 40 /2

=> q = 20

The equilibrium output is 20 units.

TC = 10q + q2

=> TC = 10(20) + (20)2

=> TC = 200 + 400

=> TC = 600

TR = Pq

=> TR = 50 (20)

=> TR = 1000

Profit = TR - TC

=> Profit = 1000 - 600

=> Profit = 400

In short run each firm is making a profit of $400.

It means new firm will get attracted and enter the industry in long run. In long run, profit will be zero.

Answer: Option (A)