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Market Structures” Please respond to the following:
Assume Katrina’s Candies operates in an imperfectly competitive market structure and faces the following weekly demand and short-run cost functions: (VC is variable cost, MC is marginal cost, and FC is fixed cost)
P = 50-0.01Q and MR = 50-0.02Q (Note that the P equation is the demand curve equation)
VC = 20Q+0.006665 Q2 , MC=20 + 0.01333Q , and FC = $5,000 (Note that TC (total cost) = FC + VC )
Where price is in $ and Q is in kilograms. All answers should be rounded to the nearest whole number.
1. Algebraically, determine what price Katrina’s Candies should charge in order for the company to maximize profit in the short run.
2. Determine the quantity that would be produced at this price and the maximum profit possible.
3. Optional extension for all to consider: Suppose Katrina’s Candies is a monopolist. Instead of maximizing profit in the short run, the firm prefers to use “limit pricing” to keep potential competitors out of the market. What should Katrina’s limit price be? Under what conditions would it be an effective deterrent? (Hint: To find the limit price, PL, set ATC = MC and solve for Q. Next, substitute this value of Q into the P equation to solve for PL. The limit price strategy will be an effective barrier to entry as long as PL is below the potential competitor’s price. )
Identify the criteria for a “shut down” and apply it to the following scenario: Suppose a firm sells 500 units per month at $50 per unit. Its fixed costs per month are $30,000 and its variable costs per month are $15,000. Would you advise this firm to continue operating in the short run? Why or why not?
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