4. Profit maximization in the cost-curve diagramm Suppose that the market for po

Question

4. Profit maximization in the cost-curve diagramm Suppose that the market for polo shirts is a competitive market. The following graph shows the daily cost curves of a firm operating in this market. Hint: After placing the rectangle on the graph, you can select an endpoint to see the coordinates of that point. 50 45 40 35 30 25 u 20 15 Profit or Loss AVC 10 0 2 4 6 8 10 12 14 16 18 20 QUANTITY (Thousands of shirts) In the short run, at a market price of $15 per shirt, this firm will choose to produce shirts per day On the preceding graph, use the blue rectangle (circle symbols) to shade the area representing the firm's profit or loss if the market price is $15 and the firm chooses to produce the quantity you already selected Note: In the following question, enter a positive number, even if it represents a loss The area of this rectangle indicates that the firm's would be $ per day

Explanation / Answer

The profit maximising condition for the firm will be when MR=MC

ie the quantity at which MC is $15

hence, In the short run, at a maret rice of $15 per shirt, this firm will choose to produce 8000 shirts per day

Total revenue will be 8000*15 i.e. 120000

The area of this rectangle indicates that the firms loss would be $ 120000

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