Suppose the market for watermelons is perfectly competitive and that there are 100 identical firms currently...
Suppose the market for watermelons is perfectly competitive and that there are 100 identical firms currently in the market. Each firm as a short run total cost curve of STC=2Q^2+150, with $150 of the fixed costs sunk. calculate the shutdown price for a typical firm.
Homework Answers
Answer
A firm will shut down if it fails to recover its total Variable cost i.e. TR < TVC.
TR = Total Revenue == P*Q and TVC = Total Variable cost*Q , P = Price, AVC = Average variable cost.
Here STC = 2Q2 + 150. As 150 is a fixed cost, thus remaining is variable and hence TVC = 2Q2
=> AVC = TVC/Q = 2Q.
In order to maximize profit a perfect competitive firm produces that quantity at which P = MC
where MC = Marginal cost = d(STC)/dQ = 4Q.
Thus P = MC = 4Q and AVC = 2Q. Hence, P > AVC.
Hence there is no P such that P < AVC.
Hence, firm will not shut down at any price.
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