Suppose the market demand and supply functions are QD=200-2P and QS=4P+53. You h

Question

Suppose the market demand and supply functions are QD=200-2P and QS=4P+53. You have just graduated and moved to this city; as a new MBA and an entrepreneur, you are considering entering the market for this product.

Question 12

You’ve researched and found that most firms in the market currently experience costs such that

TC=20+47Q-13Q^2+1.68Q^3. Determine whether or not you should enter this market.

Select one:

a. Competitive firms maximize profits when P exceeds MC but is less than ATC; since I am producing output where this occurs, then it would be profitable to enter.

b. Using the P=MC rule, the equilibrium price is below ATC at the best quantity, so entering would immediately incur losses. I should not enter.

c. Where the current equilibrium P=AVC, that price exceeds the marginal cost so I would be profitable upon entering.

d. Plugging the market equilibrium quantity into this total cost function results in huge costs for my firm, so I should not enter.

Question 13

Question text

Due to unforeseen delays, you don’t enter the market. However, a year later the market supply has changed to QS=4P+32. Are you surprised at this shift in supply?

Select one:

a. No; the losses incurred under the old supply curve would cause some sellers to exit, shifting supply to the left (which is what this new supply curve did).

b. Yes; the earlier profits should have caused mergers among firms, reducing the number of suppliers and thus supply itself (curve should shift left), though the new supply curve has actually increased (shifted right).

c. No; the profits that occurred in the previous question suggest that new firms would enter. This entry would shift supply right, which is what the new supply curve did.

d. Yes; the losses earned earlier should have reduced supply whereas this new equation shows an increase in supply.

Question 14

Given the new supply conditions (QS=4P+32), determine whether or not you should enter the market.

Select one:

a. No; the new equilibrium price is below AVC so if I entered I would have to immediately shut down.

b. Yes; the new equilibrium price is slightly above ATC at the optimal quantity. If I entered I would earn slightly above normal profit.

c. No; MC is above AVC so I would not recoup my fixed costs.

d. Yes; the new equilibrium price is now between AVC and the old equilibrium price at the optimal quantity, so firms (including my new one) will earn losses but will choose to stay open.

Explanation / Answer

12. Where the current equilibrium P=AVC, that price exceeds the marginal cost so I would be profitable upon entering.( If P= AVC then it is profitable to enter and stay in business)

13 . No; the losses incurred under the old supply curve would cause some sellers to exit, shifting supply to the left (which is what this new supply curve did).

14. . No; the new equilibrium price is below AVC so if I entered I would have to immediately shut down.

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