Question

At its current level of production a profit-maximizing firm in a competitive market receives $10 for each unit it produces and faces an average total cost of $12.5. At the market price of $10 per unit, the firm's marginal cost curve crosses the marginal revenue curve at an output level of 1,000 units. What is the firm's current profit? What is likely to occur in this market and why?

Answer 1

The profit-maximizing output of a perfectly competitive firm, Q = 1,000 units (The quantity at which MR and MC curves intersect)

Market price, P = $10

Average total cost, ATC = $12.50

Total Revenue = Price * Quantity = $10 * 1,000 = $10,000

Total Cost = ATC * Quantity = $12.50 * 1,000 = $12,500

Profit(or Loss) = Total Revenue - Total Cost = $10,000 - $12,500 = -$2,500 (loss)

The given firm is currently experiencing a loss of $2,500.

As the firms are experiencing losses, some firms are likely to exit the market in the long-run. This results in a leftward shift in the market supply curve and an increase in the market equilibrium price such that all the firms in the market earn zero economic profit i.e., they earn only normal profit in the long-run.