Question

.       Perfect Rose sells rose is one of the 1000 firms in the rose market in a perfect Competitive market. The firm has a total cost as TC=800 + 4q + 2q²

The current market price for a box of rose is P = 50

a) What is the profit-maximizing quantity for Perfect Rose? What is the total market supply?

b) What is the AVC at the profit-maximizing point?

c) What is the profit at the profit-maximizing production point?

d) What is going to happen in LR in terms of the number of firms, market supply, and market price?

e) what is the shutdown price?

f) Construct the Short-run supply curve.

g) what is the firm’s producer surplus at the profit maximum point and the market producer surplus?

2. The perfect Rose long-run AC is given below answer the following questions.

•       AC = 200 – 5q + 0.1q²

a)       What is the output? (Produce at point of q where Min AC)

b)      what is the market price, MC, and AC?

c)       What is the producer surplus?

d)      What is the economic profit?

Answer 1

A) Profit Maximizing quantity is , where MC=P=50

MC=4+4q

4+4q=50

Q=46/4=11.5

Total market supply=1000*11.5=11,500

B) ATC=TC/q=800/q+4+2q

ATC=800/11.5 +4 +2*11.5=96.56

C) Profit={p-ATC)*q=(50-96.56)*11.5=-46.56*11.5=-535.44( loss)

D)As firms are making loss in short. In long run some firms will exit the market . As a result market supply will decrease . Decrease in market supply will increase market price and increase in price will lead to firm earn zero economic profit.

So In long run numbers of firms Decreases, market supply Decreases and price Increases