The VCR manufacturing business is perfectly competitive. Suppose that currently, firms that manufacture VCRs utilize either technology 1 or technology 2, whose cost functions are TC1(Q) = 1,120 - 60Q + Q2
TC2(Q) = 300 - 20Q + Q2
In the long run, assuming no new manufacturing technologies,what will happen in this industry?

Question

Quizplus · Accepted Answer

In the long run, firms in perfectly competitive markets will exit the market if they are unable to cover their average total cost. Average total cost is equal to total cost divided by the quantity of output produced (ATC = TC/Q). Therefore, the firms utilizing technology 1 will have higher average total costs than the firms using technology 2 at any given level of output. This means that firms utilizing technology 1 will not be able to compete with firms using technology 2 and will eventually exit the market. The firms utilizing technology 2 will remain in business because they are able to produce at a lower cost than the firms using technology 1.

The VCR Manufacturing Business Is Perfectly Competitive