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2) For the following firm in a competitive market, a) What is the profit maximizing quantity (approximately) when the market
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Answer #1

Profit maximizing condition under competitive market is P=MC.

(a) When P=$8 , then profit maximizing quantity is approximately 4 units.

(b) Profit is represented by the rectangle area above ATC and below the price at the profit maximizing quantity. It is shown in the below graph:

Roll of to ATC lot + + 3 10 il 4 5 duantity

(c) If the price falls to $5. Then, we can see that profit maximizing quantity is approximately 2.5 units . At this output level P<ATC but P>AVC , so firm will continue to produce in the short run.

In the long run , because firms earning negative profit ,therefore firms exit the market.

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