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The demand for petroleum is Q = 240-2P
The demand for petroleum is Q = 240-2P. The marginal cost per barrel is 40 euros. The fixed cost amount to 100 euros per day in the short term.
a) Calculate the profit maximizing equilibrium price and equilibrium quantity with perfect competition in the short term.
b) Calculate the profit in the short-term equilibrium.
Suppose that in the long term the variable costs amount to 60 euros and that demand for oil is still Q = 240-2P.
c) Calculate the profit maximizing equilibrium price and equilibrium quantity with perfect competition in the long term.
d) Calculate the profit in the long-term balance
Expert Solution
a) In short run, firm supply curve is marginal cost curve and equilibrium occurs when demand = supply.
240 - 2P = 40
2P = 200
P = 100
At this price, Q = 40
b) Cost of producing 40 units = Fixed Cost + Marginal Cost per unit * 40 = 100 + 40 * 40 = 1,700
Total revenue from selling 40 units at a price of 100 is 40 * 100 = 4,000
Total profit = Total revenue - Total cost = 4,000 - 1,700 = 2,300
c) In long run, there is no fixed cost. Equilibrium occurs when demand = variable cost
240 - 2P = 60
P = 90
At this P, Q = 60
d) Total cost in long run = Variable cost * Q = 60 * 60 = 3,600
Total revenue in long run = 90 * 60 = 5,400
Total Profit = 5,400 - 3,600 = 1,800
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