Question

In: Economics

#17 Let the following equations describe the conditions facing a small-to-medium sized firm that sells a...

#17

Let the following equations describe the conditions facing a small-to-medium sized firm that sells a product with some close substitutes.

TR= $10,000Q - $7.8Q^2

TC = $200,000 + $2,320Q + $5Q*2

a. Find the short run profits of this firm and graph it.

b. Do we expect profits to remain? explain fully

c. Draw the appropriate (approximate) graph showing the long run situation. Explain your reasoning. (no need to calculate specific AC or AR, MC or MR curves or long run equilibrium points.)

Expert Solution

Answer:

A]

There is a small-to-medium sized firm that sells a product with some close substitutes.

TR= 10,000Q - 7.8Q^2

TC = 200000 + 2320Q + 5Q^2

a) Find the short run profits of this firm, and graph.

Profit will be maximized by this firm. Hence we have

Profit = TR - TC = 10000Q - 7.8Q^2 - 200000 - 2320Q - 5Q^2

= 7680Q - 12.8Q^2 - 200000

Profit is maximum when its derivative is zero

7680 = 25.6Q

Q = 300

Profit is maximum = 7680*300 - 12.8*300^2 - 200000 = 952000

B]

Do we expect profits to remain? Explain fully.

We do not belive this because there are close substitutes of this products and other firms will try to undercut the price proposed., New firms will also enter which will reduce the demand for its product.

C]

Draw the appropriate graph showing the long run situation. Explain your reasoning. [No need to calculate specific AC or AR, or MR or MC curves or long run equilibrium points].

In the long run we expect the firm to have zero economic profits and so Price will be equal to ATC

Rahul Sunny answered 1 year ago

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