Question

Figure 14-3 Suppose a firm operating in a competitive market has the following cost curves 1 Price MC ++++++++++ ATC Refer to Figure 14-3. If the market price is $10, what is the firm's short-run economic profit? $15 B. $30 C. $9 D. $50

Answer 1

Answer

The correct answer is (A) $15.

In order to maximize profit a competitive firm produces that quantity at which P = MC

where P = Price and MC = Marginal Cost.

It is given that P = Market price = 10. We can see from above figure that P = MC = 10 when Quantity(Q) = 5 units.

When Quantity= 5 units, ATC = Average Total Cost = 7.

Profit = TR - TC

where TR = Total Revenue = P*Q = 10*5 = 50 and TC = Total Cost = Average Total Cost*Q = 7*5 = 35

Thus, Profit = TR - TC = 50 - 35 = $15

Hence, the correct answer is (A) $15.