Suppose each firm in the market for giant cookies (a) has an identical cost 1. F

Question

Suppose each firm in the market for giant cookies (a) has an identical cost 1. Find the ATC, AVC, and MC for a giant cookie manufacturer with this 2. At what market price will a firm with this cost function make zero profit? function c(g)-54 +12q+6q cost function. 3. Suppose market price of giant cookies is p 60. How much will a firm produce in a perfectly competitive market? Find the profit for a firm with this cost function. 4 Should we expect entry into or exit from this market if p 60 5. How much output will each firm produce in equilibrium in the long run? At what price will firms earn exactly zero profit at this level of output? 6. Suppose the market demand function for q is given by Qu 492 - 4p How many firms will operate in this market in the long run? Explain whether or not perfect competition a reasonable model for a market with this many firms. 7. Suppose an increase in rent for industrial kitchens changes the cost func- tion for each firm to c(v) 96 + 129 + 692. Show graphically how the change in cost function changes the short and long run market equilib- rium price and quantity. (set up cost curves and supply and demand graph side by side) 8. How many firms will exit the market due to the cost increase?

Explanation / Answer

1. The Total cost = c(q) = 54 + 12q + 6q2

Average total cost = c(q)/q = 54/q + 12 + 6q

Marginal cost = d(c(q))/ dq = 12 + 12 q

In the total cost, the fixed cost = 54 (since it is independent of q)

So, total variable cost(TVC) = total cost - 54 = 12q + 6 q2

Average variable cost = TVC/q = 12 + 6q

2. Let the price be p. Therefore total revenue = pq

Profit = Total revenue - total cost = pq - (54 + 12q + 6 q2)     (1)

When the profit = 0

pq = 54 + 12q + 6 q2

p = 54/q + 12 + 6q = average total cost

So, when profits are zero price is equal to the average total costs.

3. p = 60

For a perfectly competitive market, price is equal to marginal cost

So, 60 = 12 + 12 q or q = 4

Therefore, the firm will produce 4 units.

Setting p = 60 and q=4 in the profit function (1)

Profit = (60*4) - 54 - (12*4) - 6(16) = 240 -54 -48 -96 = 42

So, with this cost function the firm makes a profit of 42.

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