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competitive_pract_sol - COMM/FRE 295 Solutions to Practice...

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COMM/FRE 295 Solutions to Practice Set #4 Competitive Market Question #1 Conigan Box Company produces cardboard boxes that are sold in bundles of 1000 boxes. The market is highly competitive, with boxes currently selling for $100 per thousand. Conigan's total cost is: TC = 3,000,000 + 0.001Q 2 where Q is measured in thousand box bundles per year. (a) Calculate Conigan's profit maximizing quantity. Is the firm earning a profit? (b) Analyze Conigan's position in terms of the shutdown condition. Should Conigan operate or shut down in the short-run? a. Given that the industry is competitive, Conigan maximizes profits where P = MC. 100 = 0.002Q Q = 50,000 Profit: π = R – C = 100*50,000 – 3,000,000+0.001(50,000) 2 = - 500,000 Conigan is losing $500,000 per year. b. To determine if the firm should operate or shutdown, we must compare P to AVC. AVC = VC/Q = 0.001Q = 0.001*50,000 = $50. Since P > AVC, the firm should continue producing in the short run. Question #2 Suppose you are the manager of a watch-making firm operating in a competitive market. Your cost of production is given by C = 200 +2q 2 , where q is the level of output and C is total cost.
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