Question

You are a manager in a perfectly competitive market. The price in your market is $14. Your total cost curve is C(Q) = 10 + 4Q + 0.5 Q2 and marginal cost curve is MC(Q) = 4 + Q. What price should you charge in the short-run?

Answer 1

Answer: any price above Zero

Explanation: let us first calculate average variable cost (AVC) = VC/Q

The firm should produce where price is equal to marginal cost so that 14 = 4 + Q

Make Q the subject of formula

Q = 10

Subtitle Q in AVC and MC

AVC = 4+0.5Q = 4 + 0.5 × 10 = $9

MC = 4 + 10 = $ 14

The firm will sell its output at any price above zero in the short run, because marginal cost is above

average variable cost. for all positive prices. Profit is negative if

price is just above zero.