3 Use the following figure for a firm in a perfectly competi

3 Use the following figure for a firm in a perfectly competitive market: MC ATC 24 12 20 28 36 Output What is the output that maximizes the firm\'s profit? a. b. At the profit maximizing output, calculate: i. Total Revenue ii. Total Cost If the firm maximizes profit, how much profit does it earn? What will likely happen to market demand or market supply in the long run? What will likely happen to the market price in the long run? c. d. e.

Solution

a) Profit is maximized when MR = MC = P

Output = 28

b) Total Revenue = PQ = 28 x 24 = $ 672

Total Cost = ATC x Q = 18 x 28 = $ 504

c) Profit = TR - TC = $ 168

d) Market supply would shift to the right (more would be supplied at each price level) as more firms would be attracted to this market owing to positive profits. (P > ATC)

e) Market price would fall as supply shifts to the right and would stabilize when P = ATC = $16