Question

Ophelia sells flowers in a perfectly competitive market. Her total cost function, including opportunity costs, is TC = 175 + 0.05Q²

a) If the market price is $5, how many flowers will she sell?

b) Should she operate in the short-run? Answer "yes" or "no"

c) Should she operate in the long-run? Answer "yes" or "no"

Answer 1

A.

TC = 175 + .05Q^2

So,

MC = .1Q

output is produced at a level, where MC = P

.1Q = 5

Q = 5/.1

Q = 50 units

So, flowers to be sold is 50 units.

==

B.

Yes

Working note:

AVC = .05Q^2/Q = .05Q

AVC = .05*50

AVC = $2.5

Since AVC is less than price level of $5, so firm will operate in the short run.

==

C.

No

Working note:

ATC = (175+.05*Q^2)/Q = (175+.05*50^2)/50

ATC = $6

Since ATC is more than price, then firm will exit in the long run if it is unable to achieve normal profit (ATC = P)