Question

МС ATC ATCAVC Price and cost (dollars per unit) 0 5 10 15 20 25 30 35 40 45 50 Quantity (units per day)

1. The figure below provides the cost curves for a firm in a perfectly competitive market.

1. If the price market price is $16, what is the profit maximizing level of output for the firm? How much profit does this firm earn at this level of output?

2. Given your answer in part a, explain what will happen to this industry in the long run.

2. Jim recently quit his part time job (working 15 hours per week making $8 per hour) and opened a photocopy service out of his dorm. He incurred the following costs for the first four weeks of operation: $100 per week to rent a photocopy machine, 8000 pages of paper at $0.01 per page, and $50 for ink cartridges. Jim has sold all 8000 pages (at $0.10 per page). What is Jim’s accounting profit? What is Jim’s economic profit?

Answer 1

Answer 1. In Perfectly competitive firm equilibrium occurs at P=MC

a. P= $16

When P=MC=16

Q= 35

ATC at Q=35 is $12.2

Profit= (P-ATC)*Q= (16-12.2)*35= $133

b. Since the firm is earning positive profits in the short run, there will be entry of new firms in the market which will drive down the profits. New firms will enter till the firms start earning nominal profits.