2. The S.G. Allen Fabric Company sells cotton fabric in a perfectly competitive marketat a price of $4 per yard. Its marginal cost, average variable cost, and average totalcost curves in the short run can be seen below:Łprice4MCAVCATCd=MRqFind the profit-maximizing level of output and mark it q*. Shade in the area of profitearned by the firm. Is it positive or negative? Should the firm continue to operate in theshort run? Show the short-run supply curve for this company.

Profit maximising level condition - 1) Marginal revenue (MR)= marginal Cost (MC) 2) MC should be rising at the level. profit maximising level is q* . At q* , firm is incurring negative profits . profit = (AR - ATC )Q from the diagram , at q* , AR = OP level , ATC = OB level and ATC > AR so negative profit is shown by blue shaded region . # firm should continue to operate in the short run because it is covering Fixed cost and some portion of variable cost ( shown in red region ) . shut down point is the level where AVC = AR , at this point firm is getting only fixed cost recovered and no portion of variable cost is received by firm. Supply curve is shown by the marginal curve . Above the shut down point ( AVC=AR) , rising portion of MC curve shows supply curve of the firm . This is because below the shut down point , firm is not able to operate and should shut down its operation as it is not recovering variable cost .

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Economics

price 4 MC AVC ATC d=MR q e profit-maximizing level of output and mark it q*. Shade in the area of profit by the firm. Is it positive or negative? Should the firm continue to operate in the un? Show the short-run supply curve for this company.

price 4 MC AVC ATC d=MR q e profit-maximizing level of output and mark it q*. Shade in the area of profit by the firm. Is it positive or negative? Should the firm continue to operate in the un? Show the short-run supply curve for this company.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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