Suppose you are working for a firm producing cotton balls – an industry for which there are many different firms producing an identical product. The market price is $20 per case of cotton balls, and the firm is currently producing 30 cases. As the manager tasked with making production decisions for the firm, you begin by estimating the cost function, and find that the cost function is given by: c(????) = 10 + ???? + 1/3 ????^2 .
a. Is this a short run or long run cost function?
b. What adjustments to the production decisions would you make to increase profits?
c. Given your recommendation to (b) above, by how much would the firm’s profits increase?
