A small nation has three gasoline suppliers with a linear monthly market demand equal to: Q = 500,000 - 5P. Each firm's marginal cost (MC)and average total cost (ATC)curves are horizontal at $10,000 per month.
-Refer to the information above. If the firms compete, how much do each of the firms earn in profit?

Question

Quizplus · Accepted Answer

If the firms compete, they will produce where MC=MR (marginal revenue) and charge a price equal to MC.

From the demand equation, we know that P=100,000-Q/5000.

Setting MC=MR (which is equal to price in a competitive market), we get:

10,000 = 100,000 - Q/5000

Q = 400,000

So each firm will produce 400,000/3 = 133,333 gallons of gasoline per month.

Then, the price will be P=10,000.

Total revenue for each firm is:

TR = P*Q = 10,000*133,333 = $1,333,330

Total cost for each firm is:

TC = ATC*Q = 10,000*(400,000/3) = $1,333,333.33

Therefore, each firm earns profit equal to:

Profit = TR - TC = $1,333,330 - $1,333,333.33 = -$3.33

This means that each firm actually incurs a loss of $3.33 per month. Therefore, the answer is C) $0, since the firms do not earn any profit in a competitive market.

A Small Nation Has Three Gasoline Suppliers with a Linear