The graph below shows a perfectly competitive firm in short run equilibrium, where the firm has chosen the output level which maximizes profit. Think about what will happen in the market over time. In the long run Question 35 options: a) price will decrease until economic profit is zero. b) demand will increase causing economic profits to increase. c) price will increase until economic profit is positive. d) price will increase causing economic profits to increase.
The graph below shows a perfectly competitive firm in short run equilibrium, where the firm has chosen the output level which maximizes profit. Think about what will happen in the market over time. In the long run Question 35 options: a) price will decrease until economic profit is zero. b) demand will increase causing economic profits to increase. c) price will increase until economic profit is positive. d) price will increase causing economic profits to increase.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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The graph below shows a perfectly competitive firm in short run equilibrium, where the firm has chosen the output level which maximizes profit. Think about what will happen in the market over time. In the long run
Question 35 options:
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Transcribed Image Text:The image presented is an economic graph depicting the concepts of cost and demand in relation to quantity. The graph is plotted with Quantity (Q) on the x-axis and Price (P) on the y-axis. Here's a detailed explanation:
1. **Curves:**
- **MC₁ (Marginal Cost)**: This curve is an upward-sloping red line, indicating that as the quantity increases, the marginal cost of producing an additional unit rises.
- **ATC₁ (Average Total Cost)**: This curve is a U-shaped purple line. It initially decreases, reaches a minimum point, and then increases as quantity rises.
- **AVC₁ (Average Variable Cost)**: This line is also U-shaped and lies below the ATC₁ curve. It follows a similar pattern, reflecting variable costs averaging out over units produced.
2. **Demand Line (D₁)**: This is a horizontal green line indicating a perfectly elastic demand at a fixed price of 20. It suggests that the quantity demanded remains constant regardless of the price within this framework.
3. **Grid and Axis:**
- The graph is set on a square grid. Quantities are measured at intervals of 6, ranging from 0 to 54.
- Prices are also plotted, increasing in increments of 4, from 0 to 36.
Overall, this graph demonstrates the relationship between different cost measures and market demand, emphasizing how marginal and average costs interact with price levels and quantity in an economic context.
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