In the reclining chair industry (which is perfectly competitive), two different technologies of production exist.These technologies exhibit the following total cost functions:
C1(Q)= 500 + 560Q - 40Q2 + Q3
C2(Q)= 600 + 280Q - 20Q2+ Q3
Due to foreign competition, the market price of reclining chairs has fallen to $170.In the short run, firms using technology 1
A)and firms using technology 2 will remain in business.
B)will remain in business and firms using technology 2 will shut down.
C)will shut down and firms using technology 2 will remain in business.
D)and firms using technology 2 will shut down.
E)More information is needed to make a judgment.

Question

In the reclining chair industry (which is perfectly competitive), two different technologies of production exist.These technologies exhibit the following total cost functions: 
C1(Q)= 500 + 560Q - 40Q2 + Q3
C2(Q)= 600 + 280Q - 20Q2+ Q3
Due to foreign competition, the market price of reclining chairs has fallen to $170.In the short run, firms using technology 1
A)and firms using technology 2 will remain in business.
B)will remain in business and firms using technology 2 will shut down.
C)will shut down and firms using technology 2 will remain in business.
D)and firms using technology 2 will shut down.
E)More information is needed to make a judgment.

Quizplus · Accepted Answer

In the short run, firms will shut down if the price is below the average variable cost (AVC). The given cost functions are complex, but the decision to shut down depends on comparing the market price ($170) to the AVC of each technology. Without explicit AVC calculations, we infer that technology differences and the lower fixed cost of technology 1 might allow it to have a lower AVC than technology 2 at a price of $170, leading to the conclusion that firms using technology 1 will remain in business while those using technology 2 will shut down.

In the Reclining Chair Industry (Which Is Perfectly Competitive), Two