Exercise 1

In competitive markets, that is , perfect competition, it is common for the demand curve to be horizontal.
This is due to same identical proucts sold by many competitors who are price takers. Given these facts,
particularly the homogeneous product, rising the price is not wise. Thus the demand curve is horizontal.
In this case, the key concept that must be implemented is the profit maximization imperative
where the firm must operate at the output level at which MR=MC. According to Hirschey and Bentzen,
Profits are maximized when Mπ=MR-MC=0.

a) The profit maximization imperative must be implemented for the firm to maximize profits in this market.
Maximum profits result when price is set equal to marginal costs. Thus P=MC, and MC=ΔTC/ΔQ

b)The volume of output that this firm must produce to maximize profits is calculated as follows:

TVC=.25Q^3-3Q^2+20Q
TVC=.75Q^2-6Q+20

P=MC
15=.75Q^2-3Q+20
15-15=.75Q^2-3Q+20-15
0=.75Q^2-3Q+5
Q=7

0=.75(7^2)-6(7)+5
0=.75(49)-6(7)+5
0=37-42+5
0=-5+5
0=0

Total Profit is maximized when the difference between marginal revenue

and marginal cost equals 0 (Mπ=MR-MC=0). This is possible when Q=7.
Thus the volume of output tht maximizes profits is 7.

Exercise 2.
The shut-down price of operations for this firm is calculated as follows:

TVC=20Q^3-60Q^2+10Q

AVC=TVC/Q=20Q^3/Q-60Q^2/Q+10Q/Q
AVC=20Q^2-60Q+10

dAVC/dQ=40Q-60=0
40Q=60
Q=1.5(1000)
Q=1,500

Price=AVC
AVC=20(1.5^2)-60(1.5)+10 20(1.5)^2-60(1.5)+10/1.5
AVC=45,000,000-90,000+10
AVC=44,910,010