2) The Green Company produces chemicals in a perfectly competitive market. The current market price is $24; the firm’s total cost is given by the…
2) The Green Company produces chemicals in a perfectly competitive market. The current market price is $24; the firm’s total cost is given by the equation C=100+4Q+Q^2
a. Determine the equations for the firms MC and AC functions
b. Determine the firm’s profit maximizing output. Determine its level of profits. Does the Green Company have an incentive to leave this industry given its level of profits? Briefly explain.
c. Now suppose the company is approached by SO Specialties Inc., who offers to license them a new technology that will change their cost function to C = F + Q + 0.5Q2. How much would the Green Company be willing to pay to SOS Inc for the right to license this technology?
d. It turns out that SO Specialties is a recently renamed company it is better known as SnakeOil Services Inc. Even worse, they have been making the same offer to all firms in this industry.
Assume that all firms have agreed to pay SOS Inc. $200 for the new technology. What do you expect to happen to the price in the industry in the long run? Provide an exact numeric answer. What do you expect to happen to firm profits in the long run? Do you think the Green Company should have purchased the new technology?
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