Question

Suppose the market for beans is perfectly competitive. The average total cost and marginal cost of growing beans in the long run for an individual farmer are illustrated in the graph to the right 10- 9- МС According to the graph, the long run equilibrium price for beans is $ 4 per box. (Enter a numeric response using a real number rounded to two decimal places.) 8- If at this price an individual bean farmer produces 30 boxes of beans per week, she will have economic profits of 6- ATC 4 3- 2- 1- 20 10 Quantity of beans (boxes per week) 70 90 100 40 50 60 0 30 80 Price and cost (dollars per box)

Answer 1

Answer

In order to maximize profit a firm produces that quantity at which P = MC ---------------------(1).

In the long run a perfect competitive earns 0 profit because if they earn positive profit then new firm enters shifting market supply curve to the right resulting decrease in price till the point comes when Profit = TR - TC = 0. Also, if they earn negative profit then existing firm exit the market resulting in shifting of market supply curve to the left which results in increase in price till the point comes when Profit = TR - TC = 0. Here P = Price, MC = Marginal Cost, TR = Total Revenue = P*Q , TC = Total Cost =ATC*Q, Q = quantity, ATC = Average total cost.

So, From (1) we have P = MC.

As discussed above In the long run a perfect competitive earns 0 profit i.e. Profit = P*Q - ATC*Q = 0 => P = ATC

Hence we have P = MC and P = ATC => P = MC = ATC.

We can see from above graph that MC = ATC = 4 when quantity = 50. Thus P = MC = ATC = 4 is the long run equilibrium price of a box of beans.

Hence, The long run equilibrium price of beans is $4 per box.

Profit = P*Q - ATC*Q,

Now Price = 4 and he is producing quantity = 30. We can see from above that When Quantity(Q) = 30, ATC = 4.5

Thus Profit = P*Q - ATC*Q = 4*30 - 4.5*30 = -15(Negative sign suggest that he is incurring a loss

Hence, If at this price an individual bean farmer produces 30 boxes of beans per week, she will have economic profit of $-15.