Question 3

A firm that makes headphones has a total cost function given by:

TC(Q) = 200 + 2Q + 4Q^2

(a) Write down MC(Q), the marginal cost function of the firm. Suppose that the firm exists in a perfectly competitive industry, and the price of a set of headphones is P = 50.

(b) Suppose that the firm decides to operate. Find Q , the quantity of headphones it will choose to produce.

(c) Calculate the firm's profit at this level of output.

(d) Is it better for the firm to shut down instead of operating? Calculate the firm's average variable cost (AVC) when producing Q and use this to explain your answer.