Question

A firm sells its product in a perfectly competitive market where firms charge a price of $80 per unit. The firm’s cost are: Total Costs: C(Q) = 40 – 8Q + 2Qsquare

Marginal Costs: MC(Q) = – 8 + 4Q
a) How much should the firm produce in the short run (to maximize profits)?

b) What are the firm’s short run profits or losses? (Profits = Revenue – Total Costs)

c) What changes can be anticipated in this industry in the long run? (What will happen to the number of firms, product price, and firm profits in the long run?)

Answer 1

Sol :

a) Profit Maximising = Marginal revenue = Marginal Cost

= $80 = -8 + 4Q

= 88/4 = Q

= 22 = Q

B) Firm total profit or loss in short run =

Total Revenue - Total cost

Total Revenue = Price x quantity

= 80 x 22 = $1760

Total cost = 40 - 8Q + 2Q²

= 40 - 8(22) + 2(22)²

=40 - 176 + 968

= 832

Total profit = 1760 - 832

= $928

C) in the long run ,

Firm will earn normal profits only because

• In the short run , firm is earning extra normal profits.
• So, bre firms will enter the industry without view to make the profits.
• Increase in number of firm will increase the supply of the product.
• And increase in supply means excess supply and product price will decreases
• If the product price decreases , firm's profit decreases and only normal profits will be earned.

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