Suppose a single firm produces all of the output in a contestable market. The market inverse...
Suppose a single firm produces all of the output in a
contestable market. The market inverse demand function is
P = 200 -2Q, and the firm’s cost function is
C(Q) = 8Q. Determine the firm’s
equilibrium price and corresponding profits.
Price: $
Profits: $
Homework Answers
Answer
A contestable market is the market where there is no barriers to entry and exit. If firms in a contestable market earns positive profit then new firm enters till each earns 0 Profit.
Thus In a contestable market each firm incurs 0 profit.
i.e. Profit = Total revenue - Total cost = 0
As, Total revenue = P*Q = Total Cost = C = 8Q
=> PQ = 8Q => P = 8.
Hence Price = $8
Profit = PQ - C = 8Q - 8Q = 0
Hence, Profit = $0.
Add Answer to:
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