Suppose each firm in the market for giant cookies (a) has an identical cost 1. F
ID: 1138334 • Letter: S
Question
Suppose each firm in the market for giant cookies (a) has an identical cost 1. Find the ATC, AVC, and MC for a giant cookie manufacturer with this 2. At what market price will a firm with this cost function make zero profit? function c(g)-54 +12q+6q cost function. 3. Suppose market price of giant cookies is p 60. How much will a firm produce in a perfectly competitive market? Find the profit for a firm with this cost function. 4 Should we expect entry into or exit from this market if p 60 5. How much output will each firm produce in equilibrium in the long run? At what price will firms earn exactly zero profit at this level of output? 6. Suppose the market demand function for q is given by Qu 492 - 4p How many firms will operate in this market in the long run? Explain whether or not perfect competition a reasonable model for a market with this many firms. 7. Suppose an increase in rent for industrial kitchens changes the cost func- tion for each firm to c(v) 96 + 129 + 692. Show graphically how the change in cost function changes the short and long run market equilib- rium price and quantity. (set up cost curves and supply and demand graph side by side) 8. How many firms will exit the market due to the cost increase?Explanation / Answer
1. ATC = (Total Cost)/ Quantity
c(q) = 54 + 12q+ 6q2
c(q)/q = 54/q + 12 + 6q
AVC = Total Variable Cost/q
In this case, 12q + 6q2 is the variable cost.
AVC = (12q + 6q2)/q = 12 + 6q
MC(q) = dc(q)/dq = 12 + 12q
Zero Profit is when Total Cost=Total Revenue
Revenue = pq
Thus ; pq = 6q2 + 12q + 54
p = 6q + 12 + 54/q
3. In a perfectly competitive market the profit is maximized when MR=MC
MR = 60 = price
MC = 12 + 12q
Thus, 60 = 12 + 12q
48 = 12q
q = 4
Profit with this cost function is
TR = 4 * 60 = 240
TC = 6(4)2 + 12(4) + 54 = 198
Profit = 240 - 198 = 42
4. Entry should be expected at this price because the profit are still not zero at the moment.