Question

In the perfectly competitive gadget industry there are 10 firms with identical costs given by C = 500 + 20q + q2, none of which believes it can alter price. Marginal cost is given by the function MC=20 + 2q. a. Find the shutdown point of one of these firms. Be sure to explain what you are doing. (5 points)

Answer 1

The explanation is below

Step-by-step explanation:

A. Shutdown point is achieved when price equal AVC. when price lowers than the AVC, firm shutdown.

VC = q^2

AVC = q

So,

P = q is the shutdown point.

B. For profit maximizing level of output,

P = MR = MC

500 = 20 + 2q

q = 240 units

So, profit maximization level of output = 240 units

C. Firm level supply curve = MC curve above the shutdown point

Number of firms = 5

So,

Industry supply curve = 10*MC = 200+20Q

Industry supply curve = 200+20Q

It shows that MC curve above the shutdown point is supply curve.