Question

1. A company is considering entering industry A which is perfectly competitive. Here are further details on the industry: 100 firms currently operating each with a fixed cost of $1,000 and TVC of 5Q2+100 Industry demand is given by P = 400-20/19 a) (40 points) Given that the industry is in the short run, that is, there is no entry and exit, how much profit would be made by each company? b) (60 points) How many firms would enter into this industry in the long run?

Answer 1

For a: As per the given data & information Each firm will produce where its Profit is maximize and as they are operating in perfectly Competetive market So the profit maximizing Conditions P = MC Here, MC = d(TVC)/dQ = 10Q + 10 In perfectly Competitive firm, Supply = MC So Supply of 1 firm will be P = 10Q + 10, Q = (P - 10)/10 Supply of 100 firms 100Q = 10P - 100 \n Q = 10p - 100 here we take 100Q = industry Supply(Q) now Equilibrium or market Price is where industry Supply = industry demand. Industry demand: P = 400 - 2Q/19 = > 19P = 7600 - 2Q Q = 7600 - 19P/2 10P - 100 = (7600 - 19P)/2 20P - 200 = 7600 - 19P 39P = 7800 P = 200 \n Each firm at P = 200 will produce P = MC 200 = 10Q + 10 Q = 19 So profit by each Company Profit = PQ - 1000 -5Q^2 - 10Q = 200 times 19 - 1000 - 5(19)^2 - 10(19) = 805 Therefore, each Company will made a profit a $ 805

Please Kindly help with Thumbs up for this answer. If any doubts feel free to query. Thank you