Consider the diagram at right, which applies to a perfectly competitive firm, which at present faces a market clearing price of $20 per unit and produces 10,000 units of output per week.
Part 2
What is the firm's current average revenue per unit?
$20
.
Part 3
What are the present economic profits of this firm?
To determine the firm's current economic profits, we need to consider the average total cost (ATC) per unit. If the average total cost is lower than the market clearing price, the firm is making economic profits. If it is equal to or higher than the market clearing price, the firm is making zero economic profits.
Unfortunately, the diagram provided does not include information about the firm's average total cost. Without this information, we cannot determine the firm's current economic profits.
ATL= 15.25
If the firm's average total cost is $15.25, and the market clearing price is $20 per unit, we can determine the present economic profits of the firm.
The formula to calculate economic profit is:
Economic Profit = Total Revenue - Total Cost
Total Revenue = Average Revenue per Unit * Quantity of Output
Total Revenue = $20 * 10,000 = $200,000
Total Cost = Average Total Cost per Unit * Quantity of Output
Total Cost = $15.25 * 10,000 = $152,500
Economic Profit = $200,000 - $152,500 = $47,500
Therefore, the firm's current economic profits are $47,500.
Is the firm maximizing economic profits?
A.
Yes, they are producing where the price equals the average cost.
B.
It is impossible to be sure with the given information.
C.
Yes, they are producing where the marginal revenue equals the marginal cost.
D.
Yes, they have economic profits.
E.
No, they are producing where the price equals the marginal cost.
The firm is maximizing economic profits if it is producing where marginal revenue (MR) equals marginal cost (MC).
Unfortunately, the given diagram does not provide information about the firm's marginal revenue and marginal cost. Therefore, we cannot determine whether the firm is maximizing economic profits with the given information.
The correct answer is B. It is impossible to be sure with the given information.
If the market clearing price drops to $12.50 per unit the firm should
A.
continue to produce since the firm can pay some of its fixed cost.
B.
continue to produce since the price exceeds the average variable cost.
C.
continue to produce since the loss is less than the fixed cost.
D.
All of the above.
E.
shut down since the price is less than the average total cost.
To determine the firm's decision if the market clearing price drops to $12.50 per unit, we need to consider the relationship between the price and the firm's cost.
If the price is greater than or equal to the average variable cost (AVC), the firm should continue to produce in the short run, as it can cover its variable costs.
If the price is greater than or equal to the average total cost (ATC), the firm should continue to produce, as it can cover all of its costs.
If the price is less than the average total cost, the firm should shut down in the short run, as it cannot cover its costs.
In this case, the firm's average total cost is not provided, so we cannot determine if the price of $12.50 per unit is less than the average total cost. Therefore, we cannot determine the firm's decision with the given information.
The correct answer is B. It is impossible to be sure with the given information.