Question

1- Given a Perfect competition firm cost function: C(Q) = 5 + Q2 & Market Price (P = $10 ) -

Find:

- Marginal Revenue

- Maximum Profits ? -

What is the Effect of Entry on Firms Output & Profit ?

What is the Effect of Entry on Firms Output & Profit ?

Answer 1

C(Q)= 5+Q²

Marginal Cost (MC) = 2Q (first derivative of cost function) .

Marginal Revenue (MR) = Price = $10.

Maximum profits is attained by producing at the point where MC=MR, thus

2Q= 10

Q=5

At output level Q=5, Total Revenue (TR)= $50 (5*10)

Total cost = 5+ 5² = $30

Maximum Profit= TR-TC = $20

When new firms enter the market, the firms profit will fall and the firm will be earning only zero economic profit in the long run i.e TR-TC will be equal to zero. The output of the firm increases with entry of firms.