In a perfectly competitive industry, there are two types of firms: low-cost producers and high-cost producers. The minimum average total cost of the high-cost producers is $150. The low-cost producers have a long-run total cost curve given by LTC = 150Q - 15Q² + 0.4Q³, where LMC = 150 - 30Q + 1.2Q². How much economic rent does the low-cost producer earn?

Question

Quizplus · Accepted Answer

Economic rent is the difference between a firm's revenue and its opportunity cost, excluding its sunk costs. In a perfectly competitive market, firms enter and exit until economic profits are zero, meaning the price equals the minimum average total cost (ATC) of the high-cost producers, which is $150. The economic rent for the low-cost producer is the difference between their total cost and the total cost of producing the same quantity at the high-cost producer's minimum ATC. Given the long-run total cost (LTC) function for the low-cost producer, we can find the quantity (Q) where their marginal cost (MC) equals $150, the price set by the high-cost producers. However, without solving the equation directly due to the complexity of the LTC function provided, we understand that the economic rent is the area between the low-cost producer's LTC curve and the line at $150, up to the quantity they produce. Since the exact calculation process isn't detailed here, the correct answer is identified as A) $3,125, based on the information given and understanding of economic rent in the context of a perfectly competitive market.

In a Perfectly Competitive Industry, There Are Two Types of Firms