Costs Analysis
Suppose that the total cost function for a single firm in a purely competitive industry is given by the following equation:
TC = $5,625 + $5Q + $0.01Q2
Because this industry is purely competitive in nature, each firm behaves as a price taker and market price is given at $20 per unit (so that P = MR = $20). Finally, assume that each of the 100 firms in the industry are characterized by identical cost functions to the one presented above, and the output in the TC function (Q) represents monthly output by an individual firm.
a)For an individual firm, what is the profit maximizing level of output (Q).
b)At the optimal level of output, what is the monthly profit earned by the typical firm.
c)Given the number of perfectly competitive firms in this market, what is total industry output per month.
Solution describes the steps to calculate profit maximizing output level and profit in a perfectly competitive environment.
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