Question

10. Suppose a perfectly competitive firm has the following total cost function: TC = 10 + (0.1 ∗ q^2). The market demand is given by Q = 100 – 10p. If p = 10, the firm's profits will be

A) 240.

B) 250.

C) 260.

D) -10 because the firm will shut down.

Answer 1

OPTION D i.e., -10 as the firm will shut down

SOLUTION:

Given,

Q = 100 - 10p

=> Q = 100 - (10 x 10) [given p= 10]

=> Q = 0

Also given,

TC = 10 + (0.1 * Q^2)

=> TC = 10 + (0.1 * 0^2)

=> TC = 10 + 0

=> TC = 10

The market demand is also denoted as price in perfect competition.

So profit of firm

= Price/demand - Total cost

= 0 - 10

= -10

Hence, the firm's profit is -10.

Also, the firm will shut down as there is no demand for its products in the market