Price (Per Unit) P1 P₂ P3 Pa 9₁ MC 92 93 94 Quantity (Units per week) (a) ATC Price (Per Unit) D P₁ P₂ D₂ Quantity (Units per week) (b) Oeconomic profit is less than zero, and firms will exit. O economic profit is greater than zero, and firms will expand production. there are zero economic profits, and there will be no entry or exit. Othere are zero economic profits, and firms will exit. D₂ D₁ Individual cost curves are represented in Graph A, while market supply and demand are represented in Graph B. If market demand curve is D2, then in the long run, Da
Price (Per Unit) P1 P₂ P3 Pa 9₁ MC 92 93 94 Quantity (Units per week) (a) ATC Price (Per Unit) D P₁ P₂ D₂ Quantity (Units per week) (b) Oeconomic profit is less than zero, and firms will exit. O economic profit is greater than zero, and firms will expand production. there are zero economic profits, and there will be no entry or exit. Othere are zero economic profits, and firms will exit. D₂ D₁ Individual cost curves are represented in Graph A, while market supply and demand are represented in Graph B. If market demand curve is D2, then in the long run, Da
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:### Graphs and Analysis for Market Structures
#### Graph A: Individual Cost Curves
Graph A contains the following elements:
- **MC Curve (Marginal Cost):** This curve is upward sloping, representing the cost to produce one more unit.
- **ATC (Average Total Cost):** This curve is U-shaped and is positioned above the MC curve after a certain quantity level.
- **Price Levels (P1, P2, P3, P4):** Horizontal lines are drawn at these points to show different price levels.
- **Quantities (q1, q2, q3, q4):** Vertical dotted lines from the intersection points of costs and price lines show production levels at various price points.
#### Graph B: Market Supply and Demand
Graph B includes:
- **Supply Curve (S):** This is an upward sloping line showing the relationship between price and quantity from producers’ perspective.
- **Demand Curves (D4, D3, D2, D1):** These are downward sloping, representing different levels of demand at various price points. D2 is specifically highlighted.
- **Price Levels (p1, p2, p3):** These horizontal lines indicate different equilibrium price levels in the market context.
### Analysis and Options
- **Statement:** Individual cost curves are represented in Graph A, while market supply and demand are represented in Graph B. If the market demand curve is D2, then in the long run, the following options are possible:
1. Economic profit is less than zero, and firms will exit.
2. Economic profit is greater than zero, and firms will expand production.
3. There are zero economic profits, and there will be no entry or exit.
4. There are zero economic profits, and firms will exit.
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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