Question

25. 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?

    1. Firms will enter the industry.

    2. Firms will exit the industry.

    3. Firms will neither enter nor exit the industry.

    4. The firm will shut down.

    5. None of the above.

Answer 1

TC = 25 + 0.5Q²

MC = dTC / dQ

=> MC = Q

A perfectly competitive firm produces at P = MC in short run.

=> P = MC

=> 50 =Q

In short run a perfectly competitive firm produces 50 units.

Profit = TR - TC

=> Profit = PQ - (25 + 0.5Q²)

=> Profit = 50 * 50 - (25 + 0.5 *(50)²)

=> Profit = 2500 - (25 + 1250)

=> Profit = 2500 - 1275

=> Profit = 1225

In short run each firm will earn a positive economic profit of $1225. It will attracts the new firms towards the industry. Hence, there will be entry of firm in long run.

Answer: Option (A) i.e., Firms will enter the industry