Problem 1 Consider the diagram below, which applies to a perfectly competitive f

Question

Problem 1 Consider the diagram below, which applies to a perfectly competitive firm, which at present faces a market clearing price of $10 per unit and produces 10 units of output per week. See pages 511-523. MC ATC AVC 10 Demand MR 7 8 9 10 11 12 Quantity a. What is the firm's current average revenue per unit? b. What are the present economic profit of this firm? C. is the firm maximizing economic profit? Explain d. If the market price drops below $7 per unit, should this firm continue to produce in the short if it wishes to maximize its economic profits (or minimize its economic losses)? Please explain

Explanation / Answer

Answer.)

a.) Average revenue per unit is same as Marginal Revenue(MR) which is $10. Note that MR is equal to demand curve (average revenue curve).

b.) Note at quantity 10 , MR is equal to Marginal cost (MC)

Economic profit = price×Quantity - Average cost× (quantity)

= $10×10 - $9×10

= $10

c.) No firm is not maximizing economic profits. Note that economic profits are positive indicating that there is still some room to increase quantity and gain more profits. Ideal situation would be zero economic profits.

d.) If the price drop below $ 7 per unit then firm should exit the market and stop the production. Note that Price below $7 would be even lower than the lowest average variable cost level.

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