Answer to Question #280952 in Macroeconomics for abeni

Question

Perfectly Competitive firm faces a market price of birr 40 and has the following

Cost function: STC = 5800+ 20Q+0.02Q2.

A. What quantity of output is best for this firm in the short-run? Why?

B. Should firm attempt to change some price other than the market price of 40? Why or why not?

Answer 1

(a) Given that:

$STC=5800+20Q+0.02Q^{2}$

$MC=20+0.04Q$

For maximum profit MC=P

But $p=40$

Therefore, $40=20+0.04Q$

$40-20=0.04Q$

$20=0.04Q$

$Q=\frac{20}{0.04}=500$

Quantity of output best for this firm is 500

(b) Total revenue is given by:

$TR=P\times Q$

$TR=40\times 500=20000$

Total cost is given by:

$TC=5800+20Q +0.02Q^{2}$

$TC=5800+20\times 500 +0.02\times (0.02\times 500^{2})=20800$

Profits is equals to Total revenue minus total cost.

$Profits=20000-20800=-800$

The firm is running at a loss.

The firm should attempt to change some price other than the market price of 40 to help it earn some profit instead of making losses.