Suppose in the short run a perfectly competitive firm has variable cost = 4q2, and MC = 8q where q is the quantity of output produced. Also, the firm has fixed cost F = 256.

Suppose in the short run a perfectly competitive firm has variable cost = 4q², and MC = 8q where q is the quantity of output produced. Also, the firm has fixed cost F = 256.

a) If the market price of the product is $88, how much output should the firm produce in order to maximize profit?

b) How much profit will this firm make?

c) Given your answer to b), what will happen to the market price as we move from the short run to the long run?

d) What is the break-even price for this market?

Solutions

Expert Solution

a) At P = 88, the firm uses P = MC or 88 = 8q or q = 88/8 = 11. Hence, firm produces 11 units in order to maximize profit

b) Profit = (P - ATC)*Q = (88 - 256/11 - 4*11)*11 = 228

c) Market price falls because positive economic profit would help new firms entering the market. This increases the supply and shifts the supply curve rightwards. This reduces price and raises quantity

d) Break even price has P = ATC = MC

256/q + 4q = 8q

4q^2 = 256

q = 8 units and Break even price P = 8*8 = $64

Rahul Sunny answered 2 years ago

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