Consider a perfectly competitive firm that faces the following market demand and market supply curves: Demand : Qd = 10,000 -10,000P + 2MSupply: Qs =40,000 +10,000P -4,000PiM=25,000 and Pi=10The firm has also estimated its AVC function to be equal to: AVC = 3.0 -.0027Q +.0000009Q2 And Fixed Costs =1600.
a. Find the profit maximizing output for this firm. What are profits?
b. Suppose demand shifts down and the new market price is $1.50. What is the profit maximizing output at this price? What are profits in this case?
c. Given your result in part b, should this firm produce or shut down? Graph the result in part b, assuming the price of $1.50, and label your SRMC, AVC and SRATC curves. Justify your answer graphically and numerically.
d. How far can market price fall before the profit maximizing perfectly competitive firm should shutdown?