Assume that the following conditions exist for a perfectly competitive firm:
price = $8.50, current output = 100 units, ATC at current output = $9.00, AVC at current output = $8.00, total fixed costs =$100 and MC at current output = $8.00.
a. Is the firm earning any economic profit currently? How much is its profit or loss?
b. Is the firm maximizing its economic profit? What should the firm do to maximize profit or minimize loss?
c. Given your answers in part b, how will the market adjust to reach long-run equilibrium? Include appropriate graphs in your explanation.
- OiyLv 68 months ago
The firm is at a loss because ATC is higher than the market price. But the price=MR is higher than MC. So an increase in output will increase the profit. The firm will be maximized if MC=MR.