Question

Consider the diagram nearby, which applies to a perfectly competitive firm, which at present faces a market clearing price of $\backslash (20$per unit and produces $10,000$units of output per week.

a. What is the firm's current average revenue per unit?

b. What are the present economic profits of this firm? Is the firm maximizing economic profits? Explain.

c. If the market clearing price drops to $\backslash )12.50$per unit, should this firm continue to produce in the short run if it wishes to maximize its economic profits (or minimize its economic losses)? Explain.

d. If the market clearing price drops to $\$7.50$per unit, should this firm continue to produce in the short run if it wishes to maximize its economic profits (or minimize its economic loses)? Explain.

Short answer

a. The firm's current average revenue is $\$20$per unit

b. This economic profits of this firm is $\mathrm{\$}42,500(200,000-157,500=42,500)$

c. The short run the firm would minimize its economic loss by producing $8,100$units per week.

d.AVC exceed TR, thus, firm should take decision to prevent the assembly.

Step-by-step solution

Introduction

As the number of firms within the market increases, we approach a wonderfully competitive market. As we approach a wonderfully competitive market, the demand curve facing one firm gets flatter and flatter. The key point is that a private firm is insignificant to what happens within the market.

Given Information (a)

At present faces a market clearing price of $\$20$per unit and produces $10,000$ units of output per week the firm's current average revenue per unit.

Explanation (a)

(a) Within the perfectly competitive firm, marginal revenue is up to average revenue. Marginal revenue ($MR$) is$\$20$ per unit.
Thus, the common revenue (AR) of the peerlessly competitive firm is $\$20$per unit.

Given Information (b)

At present faces a market clearing price of $\$20$per unit and produces $10,000$ units of output per week the present economic profits of this firm.

Explanation (b)

(b) Point of intersection of marginal revenue and monetary value is that the economic profit of perfectly competitive firm.

• The firm's price is $\$20$per unit and it produces $10,000$units. Total revenue ($TR$) is adequate to output into price $(\mathrm{Q}\times \mathrm{P}=\mathrm{TR})$, therefore, TR is $\mathrm{\$}200,000(10,000\times 20=200,000).$
• The firm's total cost (TC) is capable average total cost (ATC) into output $(\mathrm{TC}=\mathrm{ATC}\times \mathrm{Q})$, therefore, TC is $\$15.75$for $10,000$units, therefore firm's total cost is $157,500(15.75\times 10,000=157,500)$
• Firm's economic profit (P) is up to firm's total revenue minus firm's total cost $(\mathrm{P}=\mathrm{TR}-\mathrm{TC})$. Thus, economic profit of the firm is $\mathrm{\$}42,500(200,000-157,500=42,500)$.

Given Information (c)

At present faces a market clearing price of $\$20$per unit and produces $10,000$units of output per week the market clearing price drops to $\$12.50$ per unit.

Explanation (c)

(c) If the market clearing price drops to $\$12.50$ per unit, firm would experiencing the economic loss. MR curve would shift to right down to this price index.

In the above graphical presentation, the output of the firm is shown on the $x$-axis and also the price and value shown on the $y$-axis. the sole change within the graph is that the MR curve is shifted right down to the worth $\$12.50$.
At this given price $\$12.50$, the ATC exceed the value, therefore, within the short run the firm would minimize its economic loss by producing $8,100$units per week.

Given Information (d)

At present faces a market clearing price of $\$20$per unit and produces $10,000$ units of output per week the market clearing price drops to $\$7.50$ per unit,

Explanation (d)

(d) If the market clearing price were to fall to $\$7.50$ per unit, then the marginal revenue curve would shiftall the way down to this level.
If the market clearing price drops to $\$7.50$ per unit, firm would be experiencing the economic loss. MR curve would shift to all the way down to thisindicant.
In the above graphical presentation, the output of the firm is shown on the $x$-axis and therefore the price and value shown on the y-axis. the sole change within the graph is that the MR curve is shifted right down to the value $\$7.50$.
The firm would produce $5,000$units at price $\$7.50$. At now AVC exceed TR, thus, firm should take decision to prevent the assembly.