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Stable Competitive Equilibrium

Bada Bing,Ltd. supplies standard 256 MB RAM chips to the US computer and electronics industry. Like the output of its competitors, Bada Bings Chips must meet strict size,shape,and speed, specifications. As a result the chip supply industry can be regarded as perfectly competitive. The total cost and marginal cost functions for Bada Bing are
TC=$1,000,00 + $20Q = $0.0001Q(square) Don't have the option to add the 2 above Q
MC = (Triangle) TC/TriangleQ= 420 = $0.0002Q

Where Qis the number of chips produced. Total costs include a normal profit.
A. Calculate bad Bing's Optimal Output and profits if chip prices are stable at $60 each
B. Calculate Bada Bings' Optimal output and profits if chip prices fall to $30. each
C. If Ba bing is typical of firms in the industry, calculate the firm's long-run equilibrium output, price and economic profit levels.

A Q=200,000, (PIE) = $3,000,000
B Q=50,000, (Pie) =-$750,000 (a Loss)
C Q=100,000, P=$40, Pie=$0

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Solution Preview

Answer A:
For profit maximization MR = P = MC
Here MC = 20 + 0.0002Q
P = 60
Equating the two we get:
20 + 0.0002Q = 60
=> Q = 200,000
At this point profit = TR - TC
= 60X200,000 - 1,000,000 - 20x200,000 ...

Solution Summary

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