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Competitive Environment

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A firm operating in a purely competitive environment is faced with a market price of $250. The firm's total cost function (short run) is

TC = 6,000 + 400Q - 20Q^2 + Q^3

a. Should the firm produce at this price in the short run?
b. If the market price is $300, what will total profits (losses) be if the firm produces 10 units of output? Should the firm produce at this price?
c. If the market price is greater than $300, should the firm produce in the short run?

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The context of a competitive environment is emphasized.

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a. Should the firm produce at this price in the short run?

TC=6000+400Q-20Q^2+Q^3
We see that TC=6000 at Q=0, So, TFC=6000

TVC=TC-TFC=400Q-20Q^2+Q^3

AVC=TVC/Q=400-20Q+Q^2
Let us find minimum of AVC, Put d(AVC)/dQ=0
d(AVC)/dQ=-20+2Q=0
So, ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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