Suppose that Blue Inc. is a representative firm operating in a perfectly competi

Question

Suppose that Blue Inc. is a representative firm operating in a perfectly competitive
industry. Blue's total cost of production, TC, is given by the equation TC =
5000 + 5q2, where q is Blue's output.
(a) What is Blue's marginal cost as a function of output, q?
(b) If the output price is $100, what is Blue's short-run profit-maximizing output?
(c) How much profit does Blue make at this level of output?
(d) What do you expect to happen in the long-run to the number of firms in the
industry?
(e) What do you expect to happen in the long run to the price of the output? Will
this change in price be greater if this is a constant-cost or an increasing-cost
industry? Explain.

Explanation / Answer

a) What is Blue's marginal cost as a function of output, q? this is the derivative of TC MC=10q (b) If the output price is $100, what is Blue's short-run profit-maximizing output? this is when we set P=MC 100=10q q=10 (c) How much profit does Blue make at this level of output? profit = TR-MC TR=P*Q 100*10=1000-mc 1000-100=900 (d) What do you expect to happen in the long-run to the number of firms in the industry? In the long run more firms will enter the market and profits will eventually become 0 due to economies of scale (e) What do you expect to happen in the long run to the price of the output? The price of the output will decrease as more firms enter the market. The reason is that the supply curve will shift right from more firms. Will this change in price be greater if this is a constant-cost or an increasing-cost industry? Explain. This depends on who its better for, the firm or consumer. We will look at the firm and the consumer will be the opposite. If this is a constant cost, this will be worse for the firm because cost will stay the same even with new technology making things cheaper. With a increasing cost industry, this will raise the cost of producing goods but will let the firms charge consumers more even with the increase of suppliers.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.