1. (Section 11.4) Suits Only, a dry cleaning firm that specializes in cleaning b
ID: 2439914 • Letter: 1
Question
1. (Section 11.4) Suits Only, a dry cleaning firm that specializes in cleaning business suits, operates in a perfectly competitive market. The firm faces the long-run average and marginal costs shown in the figure below. LMC, LAC LMC LAC 3 2 0 10 20 30 40 50 60 70 80 Output (suits cleaned per week) a) Suppose that the firm's marginal revenue is $4.50. i. What will be the firm's long-run profit-maximizing level of output? ii. What will be the firm's long-run maximum profit? (b) The existence of positive economic profits in the dry cleaning industry induces new firms to enter or incumbent firms to exit in the long run. Suppose now the industry attains its long-run equilibrium. i. What will be the long-run equilibrium market price and the firm's output? ii. What will be the firm's economic profit?Explanation / Answer
Ans
1 55 defined by condition MR=lmc
2 (4.50-2.50)55=110 I. E revenue - cost
3 price will be equal to minimum ATC=2 and output 30
4 zero because under perfect competition economic profit in long run is zero
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