Problem
You have been recently hired by a firm to analyze production and cost. After a quick analysis, you determine that the firm can sell as much product as it can produce at a market price of $100. The firm operates in a market with numerous buyers and sellers and consumers are willing to substitute readily between firms. Your firm's total cost function is C(Q) = 200 + 5Q + 10Q2 with a marginal cost function is equal to MC(Q) = 5 + 20Q.
1. What is the current level of profits (losses) for the firm?
2. What will happen to the firm's production in the long run?
3. Given your responses in (1) and (2), explain why market price will increase, decrease, or remain the same in the long run.