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Quiz 17 Perfect Comp. Ans

# Quiz 17 Perfect Comp. Ans - 2 q At the minimum AVC MC = AVC...

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Shomu Banerjee ECON 201 PERFECT COMPETITION ANSWERS A perfectly competitive firm has a cost function given by C ( q ) = 72 + 2 q + 1 2 q 2 . The market price, P , for its product is \$20. (a) Find out quantity the firm produces in the short-run, q* . Set P = MC to find out the quantity produced: 20 = 2 + q* or q* = 18. (b) Find the profits of the firm, Π *. Total revenue = price times quantity = \$20 x 18 = \$360 Substitute q* into the cost function to get total cost: 72 + 2(18) + 1 2 (18) 2 = \$270 Therefore profits are \$360 - \$ 270 = \$90. (c) What is this firm's shut down price? The shutdown price is the minimum AVC . The AVC = TVC / q =2 + 1 2
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Unformatted text preview: 2 q . At the minimum AVC , MC = AVC . So set these two equal to each other to get the shutdown quantity: 2 + q = 2 + 1 2 q , so which holds only for q = 0, i.e., the shutdown quantity is zero. Substitute this value into either the MC or the AVC to get the shutdown price of \$2. (d) What is this firm's short-run supply curve, q s ( P )? The firm decides how much to supply (i.e. produce) by setting price equal to MC : P = 2 + q . Solving for q , we get the firm’s supply curve: q s ( P ) = P- 2 so long as P > \$2, the shutdown price. For P equal or below \$2, the firm supplies zero....
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