Suppose a perfectly competitive firm's short-run total cost (TC) is given by TC = 200...

Suppose a perfectly competitive firm's short-run total cost (TC) is given by TC = 200 + 4Q + 2Q² where Q = output and 200 = fixed cost. As a result, MC = 4 + 4Q. Suppose the price of the firm's price is $24.
	a.	How much should the firm produce in the short run to maximize its profits?
	b.	How large will the firm's short-run profits be? Remember Profit = TR – TC.
	c.	Should the firm operate or shut down in the short run? How can you tell?

Expert Solution

A) 5 units

at Profit maximization, P = MC

24 = 4 + 4 Q implies Q = 5

B) profit = -150

Profit = 24*5 - ( 200 + 4*5 + 2(5)^2)

= 120 - ( 200 + 20 + 50)

= - 150

C) since the short run profit is negative but price is greater than AVC so the firm should operate in short run.

(P = 24 and AVC = 4 + 10 = 14)

Rahul Sunny answered 2 years ago

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