A manufacturer of electronics roducts is considering entering the telephone equipment business. It estimates that if it were to begin making wireless telephones, its short-run cost functions would be as shown below:
(a) Plot the average cost, average variable cost and marginal cost on a graph.
(b) Suppose the average wholesale price of a wireless phone is currently $50. Should the company enter the market? What would be the company’s profit or loss if it were to enter the market?
(c) Suppose the firm does enter the market and that, over time, increasing competition causes the price of telephones to fall to $35. Under these circumstances, what would be the firms optimal output, price and profit (or loss)?