Question

iz 2 - Chs. 4, 5 - Requires Respondus LockDown Browser Limit: 1:00:00 Time Left:0:49:16 Fatima Chaudhary: Attempt 1 1: Question 0 (1 point) Consider the following figure for a perfectly competitive firm: 2 MC 2: e -P AC AVC Sper Unit of Output 3: Ha 4: a b c Quantity The profit maximizing quantity for the firm is: е e 5: zero, as the business would suffer a loss O a 10 b

Answer 1

The profit maximizing quantity for the firm is c

In perfect competition price is determined by the market forces of demand and supply and it remains constant at every level of output.

Also price is equal to to average revenue and the marginal revenue of the firm.

As long as marginal revenue is more than marginal cost, the firm find its profitable to produce more. If marginal revenue is less than marginal cost after c, the firm must cut down its production. the firm therefore maximizes its total profit by producing that level of output where P = MR = MC that is at c level of output. If higher output is produced beyond c, it will lead to lower profit.

The economic justification for choosing point C is that point C is a profit maximizing point if for output less than c, marginal revenue exceeds marginal cost and for output more than c, marginal cost exceeds marginal revenue. This condition holds only at point c.

In the short run the firm is earning economic or supernormal profit. The profit earned is calculated as,

Profit per unit = price per unit - cost per unit = eo - fo = ef

Total profit = profit per unit x equilibrium output = ef x oc

in the short run number of firms in the industry is fixed and the extra normal profit cannot be completed away by the entry of new firms. The amount of profit will depend upon the price which is given to the firm. the crucial assumption is that the firm tries to maximize total profit and not profit per unit.