Question

1. (60 points) Company X is in a perfectly competitive industry and is in long run. That is, X has not picked its scale and fixed equipment yet. X has two scale options: Option 1: TFC-$7,500,000, TVC(Q)-10Q+ 10,000 Q. in $. Option Il: TFC $3,000,000, TVC(a) 120+ 25,000 a2, in $. a) (10 points) Plot ATC and MC for both options on the same graph with x-axis representing the quantity and y-axis representing MC and ATC. (You can use any software) b) (10 points) Denote the quantity at which ATC and ATC are equal to each other, Qx. Solve Qx c) (15 points) What is the minimum price, denoted by Py, at which you would prefer scale I rather than scale lI? d) (15 points) Is Py equal to ATC (Qx)? Why or why not? Note that at Ox ATC (Q ATCI Ox

Answer 1

a.) b.) From the above graph, it is evident that Qx (ATC1=ATC2) is 17.

c.) The minimum price Py would be $20000, which is the marginal cost for each unit of production.

The Marginal Cost for each unit of production using scale 1 is 20000 and 50000 using scale 2. And to minimize the price, we will go for minimum cost which is scale 1.

d.) Since this perfect competition and there are no super normal profits in this market structure