Question

Question 3 Tabassum and Shashwat operate a small firm in a perfectly competitive market, the diagram illustrates its MC, ATC, AVC and its MR curves. ATC 16.00 MR a. What is their current average revenue per unit? [1 mark] 12.25 12.00 F 10.00 ---- Price and Cost ($ per unit) 0.00 6.00 b. What is their profit maximizing level of output and profit? (2 marks] 10 11 12 13 Output Per hour c. If the market clearing price drops to $10.00 per unit, should they continue to produce in the short run if they wish to maximize their economic profits (or minimize its economic losses)? Explain. (2 marks] d. What is their shutdown price? Explain. (1 mark]

Answer 1

Answer : 3) a) For perfectly competitive firm, price = MR = AR (Average Revenue) occur. Here MR is $16. This means that here the firm's average revenue is $16 per unit.

b) For perfectly competitive firm the profit-maximizing condition is P = MR = MC. Here P = MR = MC occurs at output level of 13. So, here the profit-maximizing output level is 13.

Per unit profit at profit maximizing output level = Price - ATC = 16 - 12.25 = $3.75

Total profit at profit-maximizing output level =Per unit profit * Quantity = 3.75 * 13 = $48.75

Therefore, here the firm's profit is $48.75 .

c) Yes, the firm should continue it's production in short-run. Because at firm's shutdown point the Price = AVC occur. Here the $10 price level is higher than AVC. Hence the firm should continue it's production in short-run.

d) The firm's shutdown price is that price where price is equal to AVC. Here at $8 price level the price is equal to AVC. So, here the firm's shutdown price is $8 per hour.