Question

Consider a firm facing conventional technology with U-shaped AVC and ATC and MC. The firm wants to maximize profits given an exogenously fixed price of P = $20. Further, suppose the firm correctly determines that its short run profit maximizing output is 1000 given its costs and the exogenously fixed price of $20.

Question 1A

Using the axes as constructed below, depict marginal revenue and marginal cost curves that would support the conclusion that the optimal short run output is q = 1000. Be sure to label all important values. Upload graph

Question 1B

Is this a short run equilibrium? Explain.

Question 2A

Reproduce your graph from Question 1, but add an average total cost curve to the picture in such a way that the firm is earning zero profits (π = 0).

Upload your graph.

Question 2B

Does your graph in Question 2A depict a short run equilibrium? If so, explain why. If not, explain why not.

Question 3A

Again, reproduce your graph from Question 1. For this question, depict a different ATC curve, one where the firm has negative profits (π < 0) at the profit maximizing output of 1000. Add an additional average cost curve that will allow you to determine whether to shutdown or keep producing at Q = 1000.

Question 3B

Should the firm produce Q = 1000 in the short run or should it shutdown, producing Q = 0?

Answer 1

Question 1A

Answer:

Below is the graph for Profit maximising firm and this firm is perfectly competitive firm since price is given/fixed at $20

This graph shows super normal profit/economic/positive profit of the firm.

As per above diagram firm is in the short run and is earning super normal profit/economic profit/positive profit.

o/ 6 0 loro

Its MR curve is equal to Price since exogenous price is fixed at $20 and its Price=Average Revenue=Marginal Revenue.

Firm at price p=$20 producing 1000 quantity and it is shown on X axis and price P on Y axis and SMC(Short Run Marginal Curve) and SAC(Short Run Average Cost) curve.

in perfect competition below to conditions must satisfy for the equilibrium

1 MC=MR=Price

MC: Marginal Cost

MR= Marginal Revenue

P= Price

2 MC curve should cut MR from below at the point of equilibrium and should be rising.

Question 1B

Answer: Yes it is a short run equilibrium since in the short run firm can earn super normal/economic/positive profit

As per above graph price P is more than and above its short run average cost(SAC) and profit per unit of output is the difference between average revenue and average cost and profit per unit of output is EB which is the difference between average revenue: EQ and average cost: BQ and total profit is EBAP and firm is earning economic profit and is in the short run.

Short run is the very short time for any new firm to enter and that's why firms continue to earn economic profit.

in perfect competition below to conditions must satisfy for the firms equilibrium

1 MC=MR=Price

MC: Marginal Cost

MR= Marginal Revenue

P= Price

2 MC curve should cut MR from below at the point of equilibrium and should be rising.

Answer 2

Again, reproduce your graph from Question 1. For this question, depict a different ATC curve, one where the firm has negative profits (π < 0) at the profit maximizing output of 1000. Add an additional average cost curve that will allow you to determine whether to shutdown or keep producing at Q = 1000.

Answer 3

Again, reproduce your graph from Question 1. For this question, depict a different ATC curve, one where the firm has negative profits (π < 0) at the profit maximizing output of 1000. Add an additional average cost curve that will allow you to determine whether to shutdown or keep producing at Q = 1000.