Question

A firm sells its product in a perfectly competitive market where other firms charge a price of $100 per unit. The firm’s total costs are C(Q) = 50 + 12Q + 2Q².

a. How much output should the firm produce in the short run?

_____ units


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?

a. No firms will enter or exit at these profits.

b. Exit will occur since these economic profits are too low.

c. Entry will occur until economic profits shrink to zero.

Answer 1

There is a perfectly competitive market where the price is $100 per unit. The firm’s total costs are C(Q) = 50 + 12Q + 2Q2. Hence marginal cost is MC = 12 + 4Q.

a. How much output should the firm produce in the short run?

This will be determined by the equation P = MC

12 + 4Q = 100
4Q = 88

Q = 22 units

b. What price should the firm charge in the short run?
Firms are price takers so each of them charges the same price of $100.

c. What are the firm’s short-run profits?
Profits = revenue - cost

= 100*22 - 50 - 12*22 - 2*(22^2)
= 918
d. What adjustments should be anticipated in the long run?

In the long run we expect firms to enter the industry because currently all firms are making profit in the short run. Correct choice is c. Entry will occur until economic profits shrink to zero.