The Hair Stylist, Ltd., is a popular-priced hairstyling salon in College Park, Maryland. Given the large number of competitors, the fact that stylists routinely tailor services to meet customer needs, and the lack of entry barriers, it is reasonable to assume that the market is perfectly competitive and that the average $40 price equals marginal revenue, P = MR = $40. Furthermore, assume that the firm's operating expenses are typical of the 100 firms in the local market and can be expressed by the following total and marginal cost functions:
TC = $5,625 + $25Q + $0.01Q2
MC = $25 + $0.02Q
Where TC is total cost per month including capital costs, MC is marginal cost, and Q is the number of hairstyling’s provided. Total costs include a normal profit.
A. Calculate the firm’s profit-maximizing output level.
B. Calculate the firm’s economic profits at this activity level. Is this activity level sustainable in the long run?