1. (Perfect Competition) You are on the board of a perfectly competitive firm. Your job is to determine whether your fir

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1 Perfect Competition You Are On The Board Of A Perfectly Competitive Firm Your Job Is To Determine Whether Your Fir 1 (82.1 KiB) Viewed 10 times

1. (Perfect Competition) You are on the board of a perfectly competitive firm. Your job is to determine whether your firm should stay open (and what quantity to produce if you do) or shut down. You are provided the following information from the data analysts: The market equilibrium price is $100. This means the demand curve for your perfectly competitive firm's product is constant: D = P(q) = MR = $100. • Your firm's total cost function is TC(q) = 800 + 50q + 2q² The perfectly competitive firm's profit-max decision is two-fold. You'll go through each in turn: First, the firm will calculate quantity and price that maximizes profit, as if they were going to stay open: a. Using optimization techniques, what level of quantity would maximize profit if the firm produced? Call this q'. b. What price would your firm charge? Call this p* (hint: you're given it!) c. What profit would your firm earn? Second, given (q",p"), the firm now must decide if it will stay open or shut down. d. Use calculus to determine the shutdown point of your firm. Call it (qSH, pH). e. Given the shutdown point you determined, do you recommend the firm stay open or shut down? Briefly support your answer using economic rationale. Finally, use what you've calculated to create a representative graph to give to your board members. f. Graph your firm's MR, MC, ATC, and AVC functions. g. Label your firm's production decision as you determined it above (i.e., (q",p') if they stay open or (0,0) if the shutdown). h. Shade in profit (or loss). (Hint: profit is the area of the rectangle, t = (P-ATC) × q).