Question

Beta industries manufactures floppy disk that consumers perceive as identical to those produced by numerous other manufacturers. Recently, Beta hired an econometrician to estimate its cost function for producing boxes of one dozen floppy disks. The estimated cost function is C=20+2Q^2.a. What are the firm's fixed costs?b. What is the firm's marginal cost?From question c to f, assume many other firms in the market sell the product at a price of $10c. How much should this firm charge for the product?d. What is the optimal level of output to maximize profits?e. How much profit will be earned?f. In the short run, should this firm continue to operate or shut down? why?

Answer 1

Answer:

a. Fixed costs for businesses are the ones that don't depend on Q. Fixed costs= 20

b, thus. dC / dQ= d(20 + 2Q^2)/dQ= 4Q

c. Many companies say the economy competes perfectly. For such a scenario, the company is a price-taker and would demand the same $10 price as other firms on the market to sell its products.

d. Most companies expect a reasonably open market. Hence, MR= $10 in size.

Max profit: MC= MR, then 4Q= 10= > Q= 10/4= 2.5 Optimum production level to optimize profits= 2.5 units e. Profits= Sales-Expenses= price* Q-( 20+ 2Q^2)= 10* 2.5-20-2* (2.5)^2= 25-32.5 = -7.5 Profits are thus-$ 7.5 ($7.5 loss).

f. The organization will continue to survive in the short term because $7.5 losses are smaller than the $20 fixed expense. In other words, the company can pay more than its rising output expenses, and will thus continue to work in the short run.