Question

Question 1: Consider the perfectly competitive market for notebooks. The market price for a notebook is $1.50 and the cost functions are: TC(q) = 10 +.019+.19 MC(q) = .02q +.1 a) Find the profit-maximizing quantity of notebooks produced by a firm in this market. Also, calculate the profit each firm earns in the market. b) Graphically depict the firm's profit-maximization problem. This does not necessarily need to be to scale, but should accurately reflect the sign of the profit. c) Will firms enter into this market in the long run? d) Graphically show how the price will change as the market progresses towards a long-run equilibrium. There is no need to find the exact long-run equilibrium price.

Answer 1

a) profit maximising quantity of note - books------

It occurs when marginal cost( MC) equals marginal revenue( MR) .As this is the case of perfect competition ,where Average Revenue ( AR) is equal to marginal revenue (MR).

So, profit maximising quantity (q)-----:

Where MC=price(AR)

•02q+•1=1•5

q=70

(b)To show profit ,graphically ,first we find it ,mathematically.

Equilibrium profit occurs where MR= MC,so first we find TR and TC.

TR= q×price

70×1•50= 105

TC= 10+•01q×q+•1q

Substituting the value of q (70)-----:

TC=66

TR-TC---------:. 105-66=39

So profit comes to 39

GRAPHIC PRESENTATION OF PROEIT MAXIMISING PROBLEM OF FIRM UNDER PERFECT COMPETITION TRITO Approach В.Рута 125 105 too B.ER MR/MG Approach 20 40 60 to go in quantity MO 2-0 MCMR 15t AR=MR =P tro- 05 20 40 bo to so quantity
c)
TE: In the long run the frau will continue to enter the industry. but the Condition å . ME=MR=AL under In long run the short run Cost curves lie at the lowest point ? Long sure AC aure. So the fram a in this period will earn gust none profits to only those funds willteman in the Industry which are ready to pan Just noume sufit.
d) In the long run, as the new firm enter in the market, yhe price tends to change in the following manner.

With new entrants,due to increase in supply of output, supply is greater than demand,the price goes down.

There is an increase in the cost of production due yo more competition among firms for factors of production.So, this process of rising cost and decreasing price will continue till

Long run average cost( LAC) = short run average cost ( SAC) =long run marginal cost (LMC)= short run marginal cost ( SMC) =Price= MR

LMC=SMC = MR. Price Isme SAC Short Run AC) LAC Clong Run Ac) AR= MR =P a Quantity LONG - RUN EQUILIBRIUM OF THE FIRM UNDER_PERFECT com PETITION