Question

In: Economics

The market for apple is perfectly competitive, with the short-run market supply curve given by Q = 100 + 2P and the short-run market demand curve given by Q = 400 – 4P

The market for apple is perfectly competitive, with the short-run market supply curve given by Q = 100 + 2P and the short-run market demand curve given by Q = 400 – 4P. A certain firm in this industry has a short-run marginal cost of production of MC = 5q, where q is the number of units of wheat produced by the firm.

a. (5 points) Plot the short-run market-level demand and supply curves and firm-level demand and supply curve. Q q

b. (5 points) If it is optimal for the firm to produce a positive amount of output in the short run, how much should it produce?

c. (5 points) Suppose that the firm has $120 in fixed costs, and its variable cost when producing q units of apple is given by VC = 40q. What is the firm’s profit if it produces the amount of output you found in part (a)? In the short run, should the firm produce this amount or shut down (produce q = 0)?

Expert Solution

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Market Supply Function = 100 + 2P

Market Demand Function = 400 - 4P

short-run MC of firm = 5q

a) Plot Market Supply and Demand Curve

Plot firm Demand and Supply Curve

In equilibrium

Market Demand = Market Supply

400 - 4P = 100 + 2p

400 - 100 = 2P + 4P

300 = 6P

P = 300/6 = 50

Quantity = 100 + 2P = 100 + 2(50) = 200

in equlibrium

Price = 50

Quantity = 200

in case of a firm equilibrium where Price equal to Marginal cost

price = 50

Marginal cost = 5q

5q = 50

q = 50/5 = 10

Profit Maximization

profit = total revenue - total cost

total revenue = Price* quantity = 50*10 = 500

total cost = total fixed cost + total variable cost = 120 + 40q = 120 + 40(10) = 120 + 400 = 520

profit = 500 - 520 = -20

there is loss of -20

firm should continue because its cover variable cost it is not shut down

Rahul Sunny answered 2 years ago

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