Question

ADJ Enterprises produces hydrothermocorticoids. Consider the following facts about ADJ and the hydrothermocorticoid market:

For each of the past three years, ADJ has earned the following profits: a Net Profit Margin of 6% and a Return on Investment of 11%. (Net Profit Margin and Return on Investment are two common measures of the profitability of a business; the exact details of Net Profit Margin and Return on Investment are not important for this question – in other words, you don’t have to know anything about Net Profit Margin and Return on Investment in order to answer this question successfully.)

For the past three years, other hydrothermocorticoid producers have also earned profits of a Net Profit Margin of 6% and a Return on Investment of 11%.

Producers in other industries with resources similar to ADJ have been earning profits for the past three years of: Net Profit Margin of 6% and Return on Investment of 11%.

ADJ is currently operating at full capacity; that is, it has all the business it can handle.

ADJ is currently producing a quantity of hydrothermocorticoids where Marginal Revenue is equal to Marginal Cost.

There are between 125 and 150 hydrothermocorticoid producers in the U.S. The number of additional hydrothermocorticoid producers outside the U.S. is unknown.

The largest U.S. producers of hydrothermocorticoids produce about 1.2 million tons of hydrothermocorticoids each year; the smallest producers produce about 850,000 tons of hydrothermocorticoids each year; for the last three years, ADJ has averaged production of about 1.1 million tons each year.

Worldwide demand for hydrothermocorticoids is expected to remain constant for the next ten years.

The costs of producing hydrothermocorticoids are expected to remain constant for the next ten years.

The hydrothermocorticoids produced by ADJ are identical to those produced by all other firms in the industry

There are no patents in the production of hydrothermocorticoids

Neither a government license nor a large capital investment is required to begin producing hydrothermocorticoids.

There are no network externalities or economies of scale in the production and sale of hydrothermocorticoids.

What price should ADJ Enterprises charge for its hydrothermocorticoids? Explain how you know. Your answer will not include any specific number.

Answer 1

The conditions described above indicate a state of perfect competition where price is determined by the balance of supply and demand of the product. Since there is a equilibrium between the two factors, the price that determines this equilibrium will prevail. If the firm tries to increase the prices to increase the profits, its market shares will fall accordingly, with other competitors taking up the space. In such a balanced situation, the organization has no control over the price and the equilibrium price is the one that every firm can charge.