Question

4. Short-run profit maximization or loss minimization for a perfectly competitive firm Suppose that the market for cashmere sweaters is a perfectly competitive market. The following graph shows the daily cost curves of a firm operating in this market. Profit or Loss PRICE AND COST (Dollars per sweater) 0 10 90 100 20 30 40 50 60 70 80 QUANTITY OF OUTPUT (Sweaters) In the short run, at a market price of $80 per sweater, this firm will choose to produce sweaters per day. On the previous graph, use the blue rectangle (circle symbols) to shade the area representing the firm's profit or loss if the market price is $80 and the firm chooses to produce the quantity you already selected.

Answer 1

Answer :

Here at $80 price level the firm will produce 55 sweaters per day. Because at quantity level of 55 sweaters Price (P) = MC occurs.

o o Price and most Profit 55 -Me - Quantity Ave • ATC PaMR=AR

In the above picture's diagram the shaded area is firm's profit.

Per unit profit = Price - ATC = 80 - 45 = $35

Total profit = Per unit profit * Quantity = 35 * 55 = $1,925

Therefore, here the rectangle shows the firm's profit which is $1,925 per day