Question

Calculate the price and quantity an Airline would select if it were in a Perfectly Competitive Industry.

TC = 20 + 3Q.   Demand is P=20- 2Q

1. Draw the demand curve and the MC curve.

2. How much is Consumer Surplus?

3. What is price and quantity for the Perfectly Competitive Industry?

4. What is the profit for the Perfectly Competitive Industry?

5. How much is fixed cost?

Answer 1

Answer
1)
the MC is a change in the total cost and it is found by differentiation.
MC=dTC/dQ=3
MC curve is a horizontal curve at MC=3
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to draw a demand curve
Q=0
then
P=20-2*0=20
(0,20) is the first point on the demand curve
P=0
then
0=20-2Q
2Q=20
Q=10
(10,0) is the second point on the curve and join the two point to get the curve as follows:

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2)
the firm produces at P=MC
20-2Q=3
2Q=17
Q=8.5
P=3
the price is $3 and quantity is 8.5 units
CS is the area above price and below quantity
CS=0.5*(Y axis intercept of the demand curve -P)*Q
=0.5*(20-3)*8.5
=$72.25
CS is $72.25
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3)
the firm produces at P=MC
20-2Q=3
2Q=17
Q=8.5
P=3
the price is $3 and quantity is 8.5 units
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4)
Profit=TR-TC
TR=P*Q=8.5*3=$25.5
TC=20+3*8.5=45.5
Profit=25.5-45.5=-$20
the indutry make a loss of $20

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5)

FC=the cost is same at all level and it is equal to total cost at Q=0
FC=20