There are 50 firms producing hula hoop in the US. The market price elasticity of
ID: 1211099 • Letter: T
Question
There are 50 firms producing hula hoop in the US. The market price elasticity of supply is estimated to be equal to 7. The market price elasticity of demand is estimated to be equal to -2. Suppose the market is perfectly competitive and the market price for one hula hoop is $8.
Hula High faces the following cost function C(q) = 20 + 4q + ½ q 2 . Hence its marginal cost is equal to 4 + q. Find the profit maximizing quantity for Hula High. What is Hula High’s profit? Should Hula High shut down? Why or why not?
Explanation / Answer
Find the profit maximizing quantity for Hula High.
To maximize profit in perfectly competitive, firm should produce till P = MC
8 = 4 + q
q = 4
What is Hula High’s profit?
Profit = TR - TC
Profit = P*q - TC
= 8*4 - 20 - 4*4 - 1/2*(4)^2
= 32 - 44
= -12
Should Hula High shut down? Why or why not?
No Firm should n't shut down because Firm is earning a operating proft here.
As if firm shuts down, it incurs a loss equal to fixed cost of 20,
( fixed cost = TC at q = 0, = 20)
Whereas if it operates, it is incuring a loss of 12 , and if look just the variable cost
TVC = 4q + 1/2q^2
then Profit = TR - TVC = 8*4 - 4*4 - 1/2(4)^2
= 32 - 24
= 8
So, firm is earning positive operating profit , hence firm sgould n't shut down.
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