Price (per unit) $100 A. B. O Ü Quantity (units per week) OD. MC A perfectly competitive firm will maximize profits by producing the level of output that corresponds to point ATC D Market Price P=MR
Price (per unit) $100 A. B. O Ü Quantity (units per week) OD. MC A perfectly competitive firm will maximize profits by producing the level of output that corresponds to point ATC D Market Price P=MR
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:The image contains a graph and a question related to profit maximization in a perfectly competitive firm.
### Graph Explanation
- **Axes**:
- The vertical axis represents "Price (per unit)".
- The horizontal axis represents "Quantity (units per week)".
- **Lines and Curves**:
- A horizontal line labeled with a price of "$100", which represents the market price, P = MR (Price equals Marginal Revenue).
- A U-shaped curve labeled "MC" which stands for Marginal Cost.
- Another U-shaped curve labeled "ATC" which stands for Average Total Cost.
- **Key Points**:
- Point A: Located where the market price line intersects the ATC curve.
- Point B: Located at the bottom of the ATC curve, representing the lowest average total cost.
- Point C: Where the MC curve intersects the market price line.
- Point D: Intersection of the MC and ATC curves above point C.
### Question
"A perfectly competitive firm will maximize profits by producing the level of output that corresponds to point"
- Options provided:
- ○ A.
- ● B.
- ○ C.
- ○ D.
In the context of perfectly competitive markets, firms maximize profit at the output level where marginal cost (MC) equals marginal revenue (MR), which is represented by point C in the diagram.
Expert Solution
Step 1: Define perfect competition model
In perfect competition,
There exists a large number of buyers and sellers.
The firm will produce where the price is equal to the marginal cost.
The profit is when the price is greater than the ATC, i.e., when the demand curve lies above the ATC.
The firm will produce in the short run when it is able to cover its variable cost.
In the long run, Each firm earns zero economic profit.
This means, In the long run, price = ATC.
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