Question

 5) Perfect Competition III  

 The marginal costs (MC), average variable costs (AVC), and average total costs (ATC) for a firm are shown in the figure to the right. The market price is $10.

 a. What is the firm's profit-maximizing output level?

 b. Will the firm produce in the short-run? Why or why not?

 c. If the firm is producing in the short-run, is it earning a profit [yes, no, or N/A]? What is the firm's profit or loss per unit?

 d. What is the firm's total profit or loss? Shade in this area on the graph.

 e. What will happen to this firm and industry in the long run?

Answer 1

Profit maximizing condition under perfect competition is P=MC.

(a) Firm's profit maximizing output = 20 units.

(b) Yes, the firm will produce in the short run because at Q=20 units ,P>AVC .

(c) No , firm is not earning a profit because if the firm is producing in the short run , it is earning loss because P . At Q=20 units , ATC= $22 . Therefore, Firm's loss per unit = P-ATC= (10-22) = -$12 per unit.

(d) Firm's total loss = (-12)(20)= -$240

(e) Because firms are earning negative profit , therefore in the long run firm would exit the industry .