Question

Producer Behavior -- Suppose the market for cookies is perfectly competitive. You are producing cookies. The market demand for cookies is ? = 60 − 2?? and its market supply is ? = ??. The total cost for firms to produce cookies is ?? = 50 + 4? + 2? 2 where ? denotes firm-level quantity.

a. What is the market equilibrium price?

b. How much cookies you should produce to maximize your profit?

c. What do you think will happen to firms in cookies market in the long run?

Answer 1

At Eqilibrium

Quantity demanded =Quantity supplied

Qd=Qs

(60-P)/2=P

P=20

So Equilibrium price (P)=20

2) PROFIT= TOTAL REVENUE - TOTAL COSTS

PROFIT= TR - TC

PROFIT = PRICE * QUANTITY - TC

PROFIT = 20q- (50+4q+2q^2)

PROFIT= 16q -50-2q^2

we differentitation the profit function with respect to q we get

d(profit)/dq =d(16q-50-2q^2)/dq

d(profit)/dq =16-4q

now d(profit)/dq =0

16-4q=0

q= 4

so no of cookies = 4 to maximize the profits

3) In the long run the price of cookies will be equal to marginal cost and firms will earn the zero economics profits . the firm is able to recovers the fixed costs and entry of news firm will be avoided.