Assume the competitive market shown below faces a short run price of $10. Using

Question

Assume the competitive market shown below faces a short run price of $10. Using the graph below, identify the following:

Profit maximizing output:       _______________________

Approximate mark up over cost _______________________

In the long run, the price falls to $7.50. Why does this happen?

What is the new profit maximizing output? _______________________

Assume the competitive market shown below faces a short run price of $10. Using the graph below, identify the following: Profit maximizing output: Approximate mark up over cost In the long run, the price falls to $7.50. Why does this happen? What is the new profit maximizing output?

Explanation / Answer

1)

Profit maximizing output @ P = MC

Q = 110

2)

Mark up = sale price -cost price = 10-8 = $2

3)

in long run more new firms enters into the market so profit became zero therefore P = ATC

4)

new profit maximizing output = 90

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