Answer to Question #274666 in Microeconomics for lisa

Question

Suppose the manager of a watchmaking firm is operating in a perfectly competitive market. His/her cost of production is given by C = 10+8q+2q 2 , where q is the level of output and C is total cost.

a) Which assumptions characterize a perfectly competitive market? How does this affect firms’ production ? (At which price will they supply ?) How does perfect competition affect firms’ long-run profits ?

b) If the price of watches is $20, how many watches should you produce to maximize profit?

c) Find fixed cost, average variable cost and marginal cost and sketch them in one diagram.

d) At what range of prices will the firm supply zero output ? Can you explain ? 

Answer 1

a)Assumptions of a perfectly competitive market

-Large Number of Buyers and Sellers:

-Homogeneous Products: ...

-Free Entry or Exit of Firms

`How does this affect production of a firm ,Under conditions of perfect competition, every seller should be selling the same quality of pens at the uniform prevailing price in the market.

How does perfect competition affect firms’ long-run profits ?

In the long-run, profits and losses are eliminated because an infinite number of firms are producing infinitely-divisible, homogeneous products.

b)If the price of watches is $20, how many watches should you produce to maximize profit?

In order to maximize profits in a perfectly competitive market, firms set marginal revenue equal to marginal cost (MR=MC). 

$$TC= C = 10+8q+2q^2$$

$$TR=20.q$$

$$MC={\delta TC\over\delta q}$$

$$MC=8+4q$$

$$MR=20$$

$$8+4Q=20$$

$$q=3$$

c)

d)At what range of prices will the firm supply zero output ? Can you explain ? 

In the long-run, perfectly competitive market earn zero economic profits. The long-run equilibrium point for a perfectly competitive market occurs where the demand curve (price) intersects the marginal cost (MC) curve and the minimum point of the average cost (AC) curve.