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Company profit calculation - Assignment Example

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Perfect Competition Question One MC = 3 + 6Q + 3Q2 Part (a) At the profit maximisation level, P = MC = $48: 48 = 3 + 6Q + 3Q2 Q2 + 2Q – 15 = 0 The roots of the equation are: Q = 3 and Q = -5 Since Q = -5 is not physically possible, so Q = 3. ? Profit is maximised when output level is 3 units…
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Download file to see previous pages Q = (accepted), (rejected) At Q = , ATC’’ becomes 9.61 while at Q = , ATC’’ becomes 0.381. Since Q > 0 and since ATC’’ > 0 at Q = , so it can be surmised that Q = when ATC is minimised. Part (g) Firms will neither exit nor enter in the longer run in an industry because already operating firms are creating normal profit. Since there are no incentives to either leave or enter the market in the longer run, so there will be no entry or exit in the longer run. Part (h) Question Two As market demand levels vary, the firm’s profits in any industry will tend to vary. As long as some form of economic profit is available, new firms will enter the market. Similarly, any kinds of economic loss will force firms to leave the market. When economic profit is available, the supply curve tends to shift to the right in order to reduce price. As price falls, so does economic profit and thus the incentive to enter the market. Conversely, if economic loss occurs, the supply curve shifts to the left in order to increase price. Bigger price tags tend to reduce the economic loss being faced. Market adjustments continue to occur until firms come to a point where the marginal revenue equals the marginal cost which in turn equals the price. Also, the short run average cost and the long term average cost meet the equilibrium levels to produce total market equilibrium in the longer run. Question Three A shock in demand leads to a sudden rise in demand. This in turn disrupts the market equilibrium and the supply curve tends to shift to the right while the demand curve tends to shift to the right as well. In addition, it is typical to find that the price for any product experiencing demand shock tends to increase as well. Larger quantities required are dealt with by firms operating under perfect competition. For constant cost industries, when the industry expands in reaction to demand shocks, there are no changes in the production costs or in the prices of resources. The basic contention of the constant cost industry is that as new firms enter the market, the long run average cost curve does not get affected. Hence, as the efficiency of production does not change due to demand shocks, the supply curve in the longer run becomes horizontal. Question Four Certain industries require long term economic profits in order to survive in the market. These industries may require continuous new inputs in the form of research and development (R&D). The pharmaceutical industry for example requires that research be carried out into new medicine. This may become necessary for example as one generation of antibiotics are unable to deal with the next generation of germs. The R&D process in turn requires the investment of economic profit which in turn can be labelled as a cost. The reinvested economic profit from the operation of such industries can be seen as a cost although it is not necessary that the amount of such an investment would equate to the economic profit generated. For example, the pharmaceutical industry invests in the development of a medicine that it will continue to produce constantly for decades which indicates that the economic prof ...Download file to see next pagesRead More
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