A firm sells its product in a perfectly competitive market where other firms cha
ID: 1199370 • Letter: A
Question
A firm sells its product in a perfectly competitive market where other firms charge a price of $120 per unit. The firm’s total costs are C(Q) = 60 + 8Q + 2Q2.
a. How much output should the firm produce in the short run?
b. What price should the firm charge in the short run?
c. What are the firm’s short-run profits?
d. What adjustments should be anticipated in the long run?
-Entry will occur until economic profits shrink to zero.
-Exit will occur since these economic profits are too low.
-No firms will enter or exit at these profits
-Exit will occur since these economic profits are too low.
-No firms will enter or exit at these profits
Explanation / Answer
a. How much output should the firm produce in the short run?
Where MC = Price.
MC = 8 + 4Q = 120
4Q = 120 - 8 = 112
Q = 112/4 = 28
b. What price should the firm charge in the short run?
Prices are given as $120 (all firms have the same price)
c. What are the firm’s short-run profits?
Profit = Total Revenue - Total Cost
Profit = Price * Quantity - TC
Profit = 120*28 - (60 + 8(28) + 2(28)(28))
Profit = 3360 - (60 + 224 + 1568)
Profit = 3360 - 1852 = 1508
d. What adjustments should be anticipated in the long run?
In long run, Entry will occur until economic profits shrink to zero