Suppose a firm has the following total cost function TC = 100 + 2q2. I

Suppose a firm has the following total cost function TC = 100 + 2q2. If price equals $20, what is the firm’s output decision? What are its short-run profits?

What will be an ideal response?

ANSWER

MC = 4q. To maximize profit, set 20 = 4q, or q = 5. Profit = TR – TC = (20 ∗ 5 ) – (100 + 50 ) = -50. Since FC = 100, the firm will produce 5 units and operate at a loss of 50 rather than shutting down and incurring a loss of 100.