Question

A perfectly competitive firm’s total cost is TC = 25 + 0.5Q2. The firm can sell as much as it

wants at a market determined price of $50. What will happen if there are no barriers to

entry?

a. Firms will enter the industry.

b. Firms will exit the industry.

c. Firms will neither enter nor exit the industry.

d. The firm will shut down.

e. None of the above.

Which of the following is true for a monopoly?

a. P = MC

b. P = MR

c. P > MR

d. P < MR

e. None of the above.

Answer 1

1. A perfectly competitive profit maximizing firm produces at the point where market price = MC.

Given that, TC = 25 + 0.5Q²

Or, MC = d(TC)/dQ = 0 + (0.5*2)Q = Q

Setting price = MC we get, Q = 50.

Therefore, profit maximizing output is 50 units for a firm.

At this Quantity, TC = 25 + 0.5(50)² = $150

And, total revenue = price* quantity = $(50*50) = $2500

At the profit maximizing output level, total revenue > total cost. It means each firm makes positive economic profit in the short run. This positive profit will attract other firms to the market and in the long run, other firms will enter the market.

Answer: option A

2. A profit maximizing monopolist produces at the point where MR = MC and sets it's profit maximizing price at the point where profit maximizing quantity lies on the demand curve. So for a monopoly, at the profit maximizing output level, price > MR.

Answer: option C