Question

5. Why does the concept of learning curve seem important to you? Assume that a competitive firm has a total cost function C(q) = 50+ 0.5q+ 0.08q2 . If the market price is P = $8.5 per unit, is the industry in long-run equilibrium? If not, find the price associated with long-run equilibrium

Answer 1

MC = 0.5 + 0.16q

and profit maximizing price and quantity at MR=MC.

and for comeptitive firms P =MR

so MR=MC

0.5 + 0.16q = 8.5

q = 50

In long run equilbruim , profit = 0

profit = TR -TC

profit = ( 50 * 8.5 ) - 50 + 0.5*50 + 0.08*50^2) = 425 - 275 = $275

so the profits are profits , we can say that competitive firms are not in long run equilbruim.

at long run equilbruim P =ATC , since profit equal to zero at equilbruim quantity

TC = 50 + 0.5*50 + 0.08*50^2

Tc = 50 + 25 + 200 = 275

ATC = TC / Q

ATC = 275 / 50 = 5.5

so the long run equilbrium price will be $5.5