Suppose a firm has the following short-run demand and cost schedule for a partic
ID: 1223051 • Letter: S
Question
Suppose a firm has the following short-run demand and cost schedule for a particular product. Q = 200 - 5P TC = 400 + 4Q a.) At what price should this firm sell its product? b.) If this is a monopolistically competitive firm, what do you think would start to happen in the long run? Explain. c.) Suppose in the long run, the demand shifted to Q = 100 -5P. What should the firm do? Explain. Suppose a firm has the following short-run demand and cost schedule for a particular product. Q = 200 - 5P TC = 400 + 4Q a.) At what price should this firm sell its product? b.) If this is a monopolistically competitive firm, what do you think would start to happen in the long run? Explain. c.) Suppose in the long run, the demand shifted to Q = 100 -5P. What should the firm do? Explain. Suppose a firm has the following short-run demand and cost schedule for a particular product. Q = 200 - 5P TC = 400 + 4Q a.) At what price should this firm sell its product? b.) If this is a monopolistically competitive firm, what do you think would start to happen in the long run? Explain. c.) Suppose in the long run, the demand shifted to Q = 100 -5P. What should the firm do? Explain.Explanation / Answer
(a) A price-setting firm with downward sloping demand curve will maximize profits by equating marginal revenue (MR) with marginal cost (MC).
Q = 200 - 5P
5P = 200 - Q
P = 40 - 0.2Q
Total revenue, TR = P x Q = 40Q - 0.2Q2
MR = dTR / dQ = 40 - 0.4Q
MC = dTC / dQ = 4
Equating MR with MC,
40 - 0.4Q = 4
0.4Q = 36
Q = 36 / 0.4 = 90
P = 40 - (0.2 x 90) = 40 - 18 = 22
(b) When Q = 90, TC = 400 + (4 x 90) = 400 + 360 = 760
ATC = TC / Q = 760 / 90 = 8.44
Since ATC < P, there is short run excess profit, attracted by which, new firms will enter the market which will reduce the output of each firm and increase the market supply until each existing firm earns zero excess profits.
(c)
Q = 100 - 5P
5P = 100 - Q
P = 20 - 0.2Q
TR = 20Q - 0.2Q2
MR = 20 - 0.4Q
Equating with MC,
20 - 0.4Q = 4
0.4Q = 16
Q = 16 / 0.4 = 40
P = 20 - (0.2 x 40) = 20 - 8 = 12
When Q = 40, ATC = [400 + (4 x 40)] / 40 = (400 + 160) / 40 = 560 / 40 = 14
Since ATC > P, there is economic loss, and firm will exit the market.
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