Question

Price Supply MC Price ATC I MR1 MRO Q0 01 02 Market Quantity 90 91 92 Firm Quantity 40. Refer to the graphs shown, which depict a perfectly competitive market and firm. If market demand increases from Do to Di, in the short run: A. market price rises from Po to P, and the firm's output rises from qo to qı. B. market price rises from Po to P, and the firm's output rises from Qoto Q C. market price remains at Po because perfectly competitive firms can't earn positive economic profit. D. the firm's output remains at qo because perfectly competitive firms can't earn positive economic profit.

please explain answer thank you

Answer 1

The market equilibrium price and quantity are determined by the intersection of market demand and market supply curve. So the initial market equilibrium price were P0 and quantity Q0. If market demand increases, so the demand curve shifts rightward from D0 to D1. So new equilibrium price is P1 and market equilibrium quantity increase to Q1.

Since the profit-maximizing condition of perfectly competitive firm is

P=MC

old equilibrium quantity of firm in short-run was=q0 units.

Hence new equilibrium output of firm in short-run will be will q1 units of output.

Hence firm quantity rises from q0 to q1 units and market price rises from P0 to P1.

Hence option A is the correct answer.