An automobile industry firm has a long‑run average cost function $ LRAC = 4 + 0.02Q + \frac{10}{Q} $ (costs in thousand naira per unit). The market price is $\text{₦}50$ per unit.

a) Find the output level that minimises LRAC (the minimum efficient scale, MES).

b) At that output, does the firm make a profit, incur a loss, or break even? State the profit (in thousand naira).

c) If a key input price rises, shifting the LRAC upward by 0.5 at every output (new LRAC = 4.5 + 0.02Q + 10/Q), determine the new MES and the profit status.

Question

An automobile industry firm has a long‑run average cost function $ LRAC = 4 + 0.02Q + \frac{10}{Q} $ (costs in thousand naira per unit). The market price is $\text{₦}50$ per unit.

a) Find the output level that minimises LRAC (the minimum efficient scale, MES).

b) At that output, does the firm make a profit, incur a loss, or break even? State the profit (in thousand naira).

c) If a key input price rises, shifting the LRAC upward by 0.5 at every output (new LRAC = 4.5 + 0.02Q + 10/Q), determine the new MES and the profit status.

Accepted Answer

MES ≈ 22.4 units; profit ≈ ₦1,008 (positive); after shift MES ≈ 22.4 units; profit ≈ ₦998 (positive)

Gce Model Questions Vol1 2018 Economics Question 14

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