this firm in the long run or in the short run 3 What is the

this firm in the long run or in the short run? 3. What is the lowest price at which the firm will produce? 55 0.1 Tom owns a winery which produces red wines. He is a profit maximizing taker. The market price for a bottle of red wine is $40. His costs are given by C = 0.10° + 20Q + 100 0 where Q represents the number of bottle l6o 0.1-1005 4. How many bottles will he produce and what are his profits? 5. Assume the state now requires a $100 per year license for all wine producers. A market price (here, the price of a botle of red wine) remains at $40. How many b Tom produce? What are his profits? 6. Suppose instead the state requires all wine producers to pay a $10 fee for each b assume the market price (here, the price of a bottle of red wine) remains at $40. bottles does Tom produce? What are his profits? 7. Is this firm in the long run or in the short run?

Solution

C = 0.1Q² +20Q + 100

P = MC is the point for price taking firm

MC = 0.2Q + 20

40 = 0.2Q + 20

20 = 0.2Q

Q = 20/0.2 = 100

Units produced is 100 .

Profit = PQ -TC = 100x40 - 0.1x100² - 20x100-100

Profits = $900

5. $100 here is fixed cost. thsi does not affect the marginal cost. Hence output will be the same, [rofits will be $100 less, i.e $800

6. The marginal cost increases by $10

40 = 0.2Q + 30

10 = 0.2Q

Q = 50

Profit = 50x40 - 0.1x50² - 20x50-100-10x50

Profit = $250

7. The firm is not in the long run since profits are zero for price taker in long run.