The figure shows the monopolistically competitive market for smartphones. Plot the profit-maximizing price and quantity on the graph. Is this producer earning positive or negative profits in the short run? In the long run, will supply or demand for this producer's good be affected? Will economic profits increase or decrease for this producer?
The figure shows the monopolistically competitive market for smartphones. Plot the profit-maximizing price and quantity on the graph. Is this producer earning positive or negative profits in the short run? In the long run, will supply or demand for this producer's good be affected? Will economic profits increase or decrease for this producer?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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7. The figure shows the
-
- Plot the profit-maximizing
price and quantity on the graph. Is this producer earning positive or negative profits in the short run? - In the long run, will supply or
demand for this producer's good be affected? Will economic profits increase or decrease for this producer?
- Plot the profit-maximizing
Transcribed Image Text:The graph presented illustrates the economic concepts of price determination and cost analysis related to the production and sale of smartphones. It features several key curves: demand (D), marginal revenue (MR), marginal cost (MC), and average total cost (ATC) plotted against quantity (in millions) on the x-axis and price (in dollars) on the y-axis.
1. **Demand Curve (D):**
- Represented by the downward-sloping orange line.
- This curve shows the relationship between the price of smartphones and the quantity demanded by consumers. As the price decreases, the quantity demanded increases, illustrating the law of demand.
2. **Marginal Revenue Curve (MR):**
- Illustrated by the downward-sloping light green line, which descends more steeply than the demand curve.
- The MR curve depicts the additional revenue gained from selling one more unit. It lies below the demand curve because the price must be reduced to sell additional units.
3. **Marginal Cost Curve (MC):**
- The upward-sloping dark blue line.
- This curve shows the cost of producing one more unit of smartphone. It generally increases as output increases due to diminishing returns.
4. **Average Total Cost Curve (ATC):**
- Represented by the U-shaped maroon line.
- This curve indicates the average cost per unit at different levels of production. Initially, average total costs decrease due to economies of scale but eventually increase due to diseconomies of scale.
The intersection of the MC and MR curves determines the profit-maximizing level of output for the producer. At this point, the cost of producing one more unit (MC) equals the revenue from selling that additional unit (MR). The demand curve indicates the price at which smartphones will be sold, while the ATC curve helps assess the profitability by showing the average cost of production.
This graph is a fundamental depiction of how firms decide on optimum production levels and pricing in a competitive market context, balancing cost and revenue considerations to achieve maximum profit.
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