Question

Suppose in the short run a perfectly competitive firm has variable cost = 3q², and MC = 6q where q is the quantity of output produced. Also, the firm has fixed cost F = 10,000.

a) If the market price of the product is 360, 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?

Answer 1

a) The profit maximization condition is:

MC = P

6q = 360

q = 360 / 6 = 60

Thus, the firm should produce 60 units in order to maximize profit.

b) TR = P * q = $360 * 60 = $21,600

     TC = TFC + TVC = 10,000 + 3(60)² = 10,000 + 10,800 = $20,800

Profit = TR - TC = 21,600 - 20,800 = $800

c) Since the firms are earning positive economic profit, the market price will decrease as we move from the short run to the long run. Because the positive economic profit in the short run will attract new firms to enter into the market. So, aggregate supply will increase which leads to a rightward shift in market supply curve. So, the market price will decrease.