### Market and Firm Analysis#### Graph Explanations:**Left Graph: Market Diagram**- **Axes:** - Vertical Axis (P): Price - Horizontal Axis (Q): Quantity- **Curves:** - **S (Supply Curve):** Upward sloping, indicates increasing quantity supplied with rising prices. - **D (Demand Curve):** Downward sloping, indicates decreasing quantity demanded with rising prices. - **P\* (Equilibrium Price):** The price at which the quantity demanded equals the quantity supplied.**Right Graph: Firm Diagram**- **Axes:** - Vertical Axis (P): Price - Horizontal Axis (q): Quantity- **Curves:** - **MC (Marginal Cost):** The cost to produce one more unit of a good. Upward sloping. - **ATC (Average Total Cost):** The average cost of producing a unit, shaped like a U-curve. - **MR (Marginal Revenue):** The revenue from selling one more unit, represented as a flat line in perfect competition.#### Questions:a. **Is the firm making an economic profit or loss?** - Analyze the position of the MR, MC, and ATC curves. If MR > ATC at the firm's level of output, the firm is making an economic profit. If MR < ATC, the firm is incurring a loss.b. **Will firms enter or exit this market?** - If firms are making an economic profit, other firms may enter the market. If firms are making losses, then some firms might exit the market.c. **Sketch on the graph and explain what happens to bring this market to long run equilibrium.** - In the long run, economic profits attract new firms, shifting the supply curve right, lowering prices, until profits are normalized. Conversely, if there are losses, firms exit, the supply curve shifts left, raising prices, until losses are eliminated. Sketch these shifts on the respective graphs to demonstrate the movement to long run equilibrium.

Firms in a perfectly competitive market face a perfectly elastic individual demand curve as they lack the price making ability in the presence of multiple identical rival firms. Goods sold in such a market are homogenous which makes them perfectly substitutable. As consumers can switch from one firm to another without a loss of utility, the demand curve for a single firm becomes perfectly elastic and coinciding with the marginal revenue curve. Since the intersection of the marginal revenue line and the marginal cost curve lies above the average total cost curve, the market price exceeds the average total cost of production which yields a profit for the firm in the market. The firm is currently making an economic profit as represented in the graph below. Since the incumbent firm is earning positive economic profit in the current scenario, firms outside the market will be incentivized to enter and reap the same benefits. A perfectly competitive market is devoid of barriers to entry and exit. Therefore, new firms will enter the market.The entry of new firms will increase the market supply that will shift the supply curve to the right. The rightward shift in the supply curve will reduce the market price. The reduction in the market price will push the firm's marginal revenue curve in the downward direction at the intersection of the marginal cost and average total cost curve. Consequently, the positive profit will be eliminated and the firm will be restored at the level of zero economic profits.

Answered: a. Is the firm making an economic…

Business

Economics

a. Is the firm making an economic profit or loss? b. Will firms enter or exit this market? c. Sketch on the graph and explain what happens to bring this market to long run equilibrium.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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