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?
A)Firms utilizing technology 1 and firms utilizing technology 2 will stay in business.
B)Firms utilizing technology 1 will shut down, but firms utilizing technology 2 will stay in business.
C)Firms utilizing technology 1 will stay in business, but firms utilizing technology 2 will shut down.
D)Firms utilizing technology 1 and firms utilizing technology 2 will shut down.
E)None of the above.

Question

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?
A)Firms utilizing technology 1 and firms utilizing technology 2 will stay in business.
B)Firms utilizing technology 1 will shut down, but firms utilizing technology 2 will stay in business.
C)Firms utilizing technology 1 will stay in business, but firms utilizing technology 2 will shut down.
D)Firms utilizing technology 1 and firms utilizing technology 2 will shut down.
E)None of the above.

Quizplus · Accepted Answer

In the long run, firms in a perfectly competitive market will produce where P=MC. For technology 1, the marginal cost function is MC1(Q) = 60 + 2Q, while for technology 2, the marginal cost function is MC2(Q) = 20 + 2Q. At the market equilibrium, the price will be such that both technologies' marginal cost functions intersect at a point. Solving for Q, we get Q = 530. At this output level, the price will be P = MC1(530) = MC2(530) = $1,120.

Using these price and cost functions, we can calculate the profits for each technology:
π1 = (P - ATC1(Q))Q = (1,120 - (1,120/530) - 60 - (1,120/530)^2)530 = -$39,154.94
π2 = (P - ATC2(Q))Q = (1,120 - (300/530) - 20 - (1,120/530)^2)530 = $80,845.06

Firms using technology 1 are making negative profits, so they will shut down in the long run. Firms using technology 2, on the other hand, are making positive profits, so they will continue to stay in business. Therefore, the correct answer is B.

The VCR Manufacturing Business Is Perfectly Competitive