Question #2 (20 points) You are a firm operating in a perfectly competitive mark
ID: 1105387 • Letter: Q
Question
Question #2 (20 points) You are a firm operating in a perfectly competitive market. Your cost function is: C() q, where q refers to your firm's level of output. Your marginal cost is: MC(q) = 2q. All other firms are identical to you, ie. have the same cost function. a) You are currently in the short-run, and the equilibrium price is: P. = $10, what is your profit-maximizing level of output,q? Ps 10 How much profit do you make when P = $10? Will firms enter or exit the market in the long-run? b) 10 ( 5)-L11(s)) Solve for the average total cost, ATC(), as a function of q. (i.e. NOT at level level of output in part a) d)
Explanation / Answer
c. ATC = TC/Q = 9/Q + Q
D. Long run equilibrium is at the minimum point of ATC where ATC = MC
9/Q + Q = 2Q
9/Q = 2Q-Q
Q2 = 9
Q = 3
LONG RUN PRICE WILL BE SAME AS EARLIER = 10
E. MR = 18 - Q
MC = 2Q
At equilibrimum, MC = MR
18 - Q =2Q
Q = 18/3
E.Q = 6
Q = 36 -2P
6 = 36 - 2P
2P = 36-6
P = 30/2
P = 15
TR = P*Q = 15 *6 = 90
TC = 9 +62
TC = 9+36 = 45
PROFIT = TR - TC
F. PROFIT = 90 - 45 = 45