Question

Figure 25-4 Revenue and costs MC $34 ATC 29.50 27 21 Demand MA 00 800 940 1160 Quantity Figure 25-A shows the demand and cost curves for a price searcher that charges a single price. (In the above graph, substitute "price" for the term "revenue".)

Answer 1

25. A price searcher will produce output at the point where MR = MC in order to maximize profit. Therefore, profit maximizing output level is 600 units.

Answer: option A

26. At the profit maximizing output level, profit maximizing price is $34 and ATC is $29.50. Therefore, Revenue = $(34*600) = $20,400 and Total cost = $(29.5*600) = $17,700. So, profit = Total revenue - Total cost = $(20,400 - 17,700) = $2700.

Answer: option A

27. As the price searcher firm earns positive economic profit in the short run, therefore in the absence of any barriers to entry, in long run many firms will enter the industry. So, demand curve for this firm will shift leftward and profit maximizing price will decrease to the point where at the profit maximizing quantity, price = ATC.

Answer: option D