Amy sells cheesecakes in a perfectly competitive market. The cost function of her firm is: TC= 0.2Q^2 +4Q+15.
a) Identify the total fixed cost (TFC), marginal cost (MC), and average variable cost (AVC) of Amy’s firm.
b) Assume that the equilibrium price in the market is P=60. Calculate the firm’s profit (or loss) and its optimal quantity of production for maximizing its profit. Discuss whether Amy’s firm will remain in the market or leave the market in the short run.
c) The market price for cheesecakes has been decreasing as new cheesecake sellers enter the market. Predict the price level at which Amy’s firm will stop producing cheesecakes in the short run. Estimate this firm’s short-run supply function which should be expressed in the form of Q = a+bP where a and b are constants.
