8. Critical analysis Q16 The accompanying graph shows the short-run demand and c

Question

8. Critical analysis Q16 The accompanying graph shows the short-run demand and cost situation for a price searcher in a market with low barriers to entry 5 +ATC MR 30A 5) Quantity/time The firm will maximize its profit at a quantity of units After choosing the profit maximizing quantity, the firm will charge a price of e un for shis; ouspu. The firm will receive in revenue at the profit-maximizing quantity. The total cost of production for this profit-maximizing quantity is $ The maximum profit the firm can earn in this situation is $

Explanation / Answer

The firm maximise its profit by producing quantity =30 units

This will be determined by the condition;

MR=MC

Price will be determined at this quantity line intersecting the demand curve.

So the price will be = $12 per unit

At this level Total revenue = Price * Quantity

= 12*30

=$360

At this output and price, the total cost will be=ATC*Q

=5*30

=$150

The maximum profit = TR-TC

=360-150

=$210

Since there is economic profit in the short-run therefore it will attract the new firm until the economic profit decreases to zero.

Hence for changing the situation over time, the option second is the correct explanation for the situation.

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