5. Is a price-searcher market efficient? Consider a firm that produces polo shir

Question

5. Is a price-searcher market efficient? Consider a firm that produces polo shirts in a competitive price-searcher market. The following graph shows its demand curve, marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve. Place a black point (plus symbol) on the graph to indicate the long-run price-searcher equilibrium price and quantity for this firm. Next, place a grey point (star symbol) to indicate the minimum average total cost the firm faces and the quantity associated with that cost. 100 T 90 80 s 70 60 O 50 40 a 30 20 Equilibrium *x Min. ATC ATC MR Demand 0 10 20 30 40 50 60 70 80 90 100 QUANTITY (Thousands of shirts)

Explanation / Answer

The price searcher market is known as Monopoly. It maximised its profit when MC=MR.

Because this a price searcher market, you can tell in the long run by the fact that P=ATC at the optimal quantity. Furthermore the quantity that firms produce in the long run is less than efficient scale.

( In the long run efficient scale of production is where the marginal cost intersects total cost curve. )

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