The following graph shows the cost curves of a perfectly competitive firm. a) If
ID: 1189277 • Letter: T
Question
The following graph shows the cost curves of a perfectly competitive firm.
a) If the market price is $6 per unit, what is the approximate quantity of output the firm will produce?
b) At a market price of $6, is the firm's economic profit postive or negative? Explain your answer.
c) Consider the three points A, B and C marked on the graph. At which point will economic profit be zero?
d) What would be the key difference between the price crossing through point A or point B? Which point would make it more economical to shut down temporarily (Q=0)?
e) How would the cost curves change if the total fixed cost of production for this firm increased?
Explanation / Answer
a.
In case of $6 price per unit, the firm will produce 600 quantity of output. This could be found by the price intersection with marginal cost curve.
b.
Economic profit: This is the excess revenue over and above the opportunity cost of inputs.
If the market price is $6 per unit the firm must have positive economic profit, since the marginal revenue $6 is higher than the average total cost.
c.
Economic profit would be zero at that point where marginal cost intersects with average total cost. This is point C.
d.
At the point A, the price doesn’t meet the average variable cost.
At the point B, the price meets the average variable cost.
Shut down decision: The point ‘A’ price is more economical to shut down, because the price can’t atleast recover the average variable cost.
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