Suppose a firm has the following total cost function: TC = 100 + 4q2. What is the minimum price necessary for the firm to earn profit? Below what price will the firm shut down in the short run?
What will be an ideal response?
AC = 100/q + 4q. This is minimized when dAC/dq = 0, or -100/q2 + 4 = 0. Solving yields q = 5 and AC = 40. Thus, a price greater than $40 is required for the firm to earn a profit. AVC = 4q and MC = 8q. Since AVC is below MC for all levels of output, AVC will be less than price for all levels of output. The firm will not shut down in the short run.
You might also like to view...
Suppose early Friday morning the economics club buys 200 donuts at 25 cents each, and plans to sell all of them later in the day on campus for 50 cents each
Only 60 donuts are sold at 50 cents, however, and by early afternoon the club is seen trying to unload the remaining donuts for 10 cents each. What can we conclude? A) The club was clearly engaging in predatory pricing of donuts. B) The club was clearly selling below cost. C) The club clearly misjudged the demand for donuts. D) All of the above are true.
Free ridership is associated with market failure, resulting in lower than efficient prices and higher than efficient quantities
Indicate whether the statement is true or false