Question

 2. Profit maximization of a seller in a competitive price-searchermarket

 Consider De Virtuose Cupcake, a cupcake shop in a competitive price-searcher market. The following graph shows its demand curve, marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve. Assume that the shop is operating in the short run.

 Place the black point (plus symbol) on the graph to indicate the profit-maximizing price and quantity. If the shop is making a profit, use the green rectangle (triangle symbols) to shade in the area representing its profit. If the shop is suffering a loss, use the purple rectangle (diamond symbols) to shade in the area representing its loss.

 At the profit-maximizing output and price, the shop's profit is equal to s _______ (Hint: Be sure to enter a minus sign if profit is negative.)

 Given the profit-maximizing choice of output and price, there are _______  shops in the industry than there would be in long-run equillbrium.

Answer 1

Suppose that there is a shop-shop for cupcakes which is competitive in nature. The firm produces that level of cupcakes where Marginal cost is equal to price.

The firm produces 1.5 thousand cupcakes and the equilibrium price is \(\$ 2.50\) per cupcake.

Since the ATC is less than the equilibrium price, the firm is earning positive profits.

The following figure is showing the profits.

Calculation of profits.

$$ \begin{aligned} \text { profits } &=(P-A T C) Q \\ &=(2.5-2) 1500 \\ &=\$ 750 \end{aligned} $$

At the profit-maximizing output and price, the shop's profit is equal to \(\$ 750\).

Since the firms are earning profits in the short run, the more firms enter the industry till firms start earning zero economic profits.

Given the profit-maximizing choice of output and price, there are fewer shops in the industry than there would be in long-run equilibrium.