Suppose in the automobile industry with free entry and exit,the marginal cost is constant at $5,000,two identical manufacturers are currently producing 1,000 cars each and earning zero economic profit.If the equilibrium price is $20,000,then what is the fixed cost for each manufacturer?

Question

Quizplus · Accepted Answer

Given that each manufacturer is producing 1,000 cars at a marginal cost of $5,000 per car, the total variable cost for each manufacturer is 1,000 cars * $5,000 = $5,000,000. Since they are earning zero economic profit in equilibrium, total revenue equals total cost (which includes both variable and fixed costs). The total revenue for each manufacturer is 1,000 cars * $20,000 = $20,000,000. To find the fixed cost, we subtract the total variable cost from the total revenue: $20,000,000 - $5,000,000 = $15,000,000. Therefore, the fixed cost for each manufacturer is $15,000,000.

Suppose in the Automobile Industry with Free Entry and Exit,the