TC=5+q2. It follows Mc=2q?

Question

My firm sells output in a perfectly competitive market other firms sell output at $40
1.What price should I put on the firms product
2. What level output should be produced to maximize profit
3. How much profit will be earned
4. Should I expect the profits to remain in the long run
Please explain

Answer 1

1. As a firm in a perfectly competitive market you are a price-taker. You must accept the market price of $40. If you fix price above $40 you will not sell anything and you will be forced out of business. If you sell below $40 you will not make a profit and will not survive.

2. Profit will be maximized where MC = MR. We know that MC = 2q and MR - marginal revenue -is the price (P) Therefore:

MC = MR
MC = P
2q = 40
q = 40/2
q = 20

Profit will be maximized at an output of 20 units.

3. Total profit is Total Revenue - Total Cost

Total Revenue is Output x Price
= 20 x 40
= 800

Total Cost (TC) is 5 + q2 (given)
That is 5 + (20)2 (Remember q = 20)
= 5 + 40
= 45

Total Profit is TR - TC
= 800 - 45
=755

4. If firms are making excess profits new firms will be attracted to the industry and this will lead to a fall in price and increased costs. These changes will continue until the long-run average cost curve is tangent to the to the demand curve defined by the market price.

Answer 2

Perfectly competetive means price elasticity is perfect. (price stays the same.)
1. $40
2. this will be based on demand.
3. Demand x price - expenses
4. In a perfectly competetive market. Yes.