Suppose the market demand for milk is Q^d =150-5P. Additionally, suppose that a dairy's variable costs are VC = 2Q² (where Q is the number of gallons of milk produced each day), its marginal cost is MC =4Q and there is an avoidable fixed cost of $50 per day. In the long run there is free entry into the market. Suppose the demand for milk doubles. If in the short run the number of firms is fixed and their fixed costs are sunk, what is each of the active firms' profit per unit in the short run equilibrium? A) $4 B) $20 C) $24 D) $10

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Quizplus · Accepted Answer

In the short run, with fixed number of firms and sunk fixed costs, profit per unit can be calculated as the difference between price and marginal cost (MC). Given the demand function doubles, it becomes Q^d = 300 - 5P. To find the equilibrium price, we set quantity supplied equal to quantity demanded, but we need more information to directly find this equilibrium in the given scenario. However, we know MC = 4Q, implying that the marginal cost per unit is $4 (since MC is given directly in terms of Q without needing to solve further). In the short run, firms will produce where price equals marginal cost (P = MC) to maximize profit, indicating that the profit per unit, before considering fixed costs which are sunk in the short run, would be based on the difference between the selling price and the variable cost per unit. Since we can't directly calculate the selling price without additional information, we interpret the question as asking for the marginal cost per unit, which is a component of profit calculation. Thus, the closest answer under these assumptions is $4, acknowledging that actual profit per unit would require subtracting this cost from the selling price, which isn't directly provided.

Suppose the Market Demand for Milk Is Qd =150-5P

Suppose the Market Demand for Milk Is Q^d =150-5P