What does a demand curve of a competitive firm look like? What will happen to to
ID: 1124449 • Letter: W
Question
What does a demand curve of a competitive firm look like?
What will happen to total revenue if a firm doubles output?
What is the formula for calculating profit by using Average Total Cost?
What is the short-run supply curve of the perfectly competitive firm?
Define implicit cost, explicit cost, variable cost, and sunk cost.
How does a firm determine the profit maximizing level of output?
When should a firm shut down in the short run?
Describe the production of a perfectly competitive firm in the long run.
In the long run, is the competitive firm operating at the efficient scale?
Explanation / Answer
(1) A competitive firm is too small to have any market power, therefore itaccepts the market price as its own price and its demand curve is horizontal (perfectly elastic).
(2) Total revenue = Price x Output. Therefore, price remaining constant, as output doubles, total revenue doubles.
(3) Profit = Output x (Price - Average total cost)
When Price is higher (lower) than ATC, profit is positive (negative), and when prie equals ATC, profit is zero.
(4) For a perfectly competitive firm, its short run supply curve is the portion of marginal cost (MC) curve that lies above the average variable cost (AVC). The reason is, such a firm will continue producing in short run only if its revenue can cover its variable costs, therefore price should be higher than AVC. Since profit is maximized when price equals MC, and the MC curve intersects the AVC curve at the minimum point of AVC, the firm will not produce anything if price (MC) lies below the minimum AVC.
NOTE: As per Chegg answering policy, first 4 questions are answered.
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