The following graph shows the cost curves of a perfectly competitive firm. a. If
ID: 1189346 • Letter: T
Question
The following graph shows the cost curves of a perfectly competitive firm.
a. If the market price is $6 per unit what is the approximate quantity of the output the firm will produce?
b. At a market price of $6, is the firm's economic profit positive or negative? Explain your answer.
c. Consider the three points, A, B, and C, marked on the graph. At which point will economic profit be zero?
d. What would be the key difference between the price crossing through point A or point B?
e. How would the cost curves change if the total fixed cost of production for this firm increased?
Explanation / Answer
a) The firm will produce approx. 600 units. As firm will produce till the point that price intersects MC curve.
b) Firm economic profit is positive as MC>ATC for q = 600
c) At C economic profit is zero because here MC=ATC
d) At point A firm is making loss on every unit it produces even though the MC is minimum, at this price it des not even covers the variable cost of production. But if we move to point B, firm will still make loss but now price will atleast compensate the average variable cost and losses will be because of fixed cost only.
e) if total fixed cost of production increases then only average total cost curve will change and it will not have any effect on marginal cost curve and avarege variable cost curve.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.