14 Consider the following figure Price 10 5 4 2 4 6 8 10 12

14. Consider the following figure Price ($) 10- 5 4 2 4 6 8 10 12 14 Quantity a. What type of firm is this? b. What is this firm\'s profit maximizing quantity? c. What is this firm\'s total revenue? d. Is this firm operating in the long run or in the short run? How do you know?

Solution

a) The graph above represents the perfect market condition. In this graph, the demand is perfectly elastic at the price decided by the market forces.

b) The firm under perfect market condition will maximize the profit at the quantity where the Demand curve or the MR and AR curve meet the MC curve. The MC curve meets the demand curve at quantity 10.

c) Total revenue = Quantity sold x price. The quantity sold is 10 and the price is $5. Total revenue will be $50.

d) The firm is operating under the short run equilibrium because the firm is making a supernormal profit. There is a huge difference between the cost and revenue of the firm. IN the long run, the firm will be producing at the point where the ATC is the minimum.