Reference no: EM131739150

Suppose the market demand and supply functions are QD=180-1.5P and QS=3.5P+40. 

Equilibrium Price (P) = $28, Equilibrium Quantity (Q) = 138

You have just graduated and moved to this city; as a new MBA and an entrepreneur, 

you are considering entering the market for this product.

Multiple Choice Questions below. Please show work. Thanks in Advance.

(1) You've researched and found that most firms in the market currently experience costs such that TC=15+45Q-10Q^2+1.5Q^3. Determine whether or not you should enter this market

Select one:

a. Where the current equilibrium P=ATC, that price exceeds the marginal cost so I would be profitable upon entering.

b. Plugging the market equilibrium quantity into this total cost function results in huge costs for my firm, so I should not enter.

c. Using the P=MC rule, the equilibrium price is below ATC at the best quantity, so entering would immediately incur losses. I should not enter.

d. Competitive firms maximize profits when P exceeds MC; if I was producing output where this occurs, then it would be profitable to enter.

(2) Due to unforeseen delays, you don't enter the market. However, a year later the market supply has changed to QS=3.5P+10. Are you surprised at this shift in supply?

Select one:

a. Yes; the losses earned earlier should have reduced supply whereas this new equation shows an increase in supply.

b. No; the losses incurred under the old supply curve would cause some sellers to exit, shifting supply to the left (which is what this new supply curve did).

c. Yes; the earlier profits should have caused mergers among firms, reducing the number of suppliers and thus supply itself (curve should shift left), though the new supply curve has actually increased (shifted right).

d. No; the profits that occurred in the previous question suggest that new firms would enter.  This entry would shift supply right, which is what the new supply curve did.

(3) Given the new supply conditions QS=3.5P+10, determine whether or not you should enter the market.

Select one:

a. Yes; the new equilibrium price is slightly above ATC at the optimal quantity. If I entered I'd 

earn slightly above normal profit.

b. No; MC is above AVC so I would not recoup my fixed costs.

c. Yes; the new equilibrium price is now between AVC and ATC at the optimal quantity, so firms (including my new one) will earn loss but choose to stay open.

d. No; the new equilibrium price is below AVC so if I entered I would have to immediately shut down.