1. What kind of firm is A ? 2. If the price is $150, firm A should produce Q =..

Question

1. What kind of firm is A ?
2. If the price is $150, firm A should produce Q =.............. to maximize profits.
3. If firm A produces the output in question (2) they will earn profits equal to: $................
4. Is firm A likely to be able to continue making these profits in the LONG RUN ?
5. What is the maximum technical efficiency output level for firm (A) ? Q =
6. At which output level does firm (A) have the lowest average fixed cost ? Q =
7. What kind of firm is firm (B)?
8. What is the profit maximizing output level for firm (B)? Q=
9. What price should firm (B) change to sell the profit maximizing output? P = $
10. How much profit can firm (B) make if they sell the Q from question (8) at the price from question (9) ?

Explanation / Answer

1.The firm is in perfect competition.

2.MR = MC is a necessary condition for perfect competition.

In that case,D=MR=AR.

So the profit maximisation condition is,intersection of demand curve with the MC curve.

According to the intersection the profit maximising quantity is 150.

3.

4.Is firm A likely to be able to continue making these profits in the LONG RUN -

Here we need the idea of "break Even" output.This is the case where price equals to both shortrun and long run average cost-p=ATC=LRAC.In that case the firm will produce exactly normal profit neither any profit nor any loss.In that situation the firm has no incentive to enter or exit the market.Long-run equilibrium for a perfectly competitive industry achieves the condition (MC = ATC) and ensures that firms produce output at the lowest per unit cost possible.

Here the firm is likely to be able to continue making profit in long run.

5. What is the maximum technical efficiency output level for firm (A) ? Q =200.Where, P=AC.

6. At which output level does firm (A) have the lowest average fixed cost ? Q = 100.

7.What kind of firm is firm (B)-

Firm B is a monopoly.

8.What is the profit maximizing output level for firm (B)?

Profit maximising condition is,MR=MC

Here the profit maximising level of output is 50.

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