Chapter 8
8.1 Screen 1 of 1
Question 15
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You must read each slide, and complete any questions on the slide, in sequence.
A. The accompanying graph gives the marginal cost, average total cost, and marginal revenue curves for a firm in a perfectly competitive market. What is the output that maximizes the firm’s profits?
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Correct. The output at which any firm maximizes profit is where MR = MC. At this point, marginal revenue equals marginal cost, so profit cannot be increased by changing output.
Incorrect. The output at which any firm maximizes profit is where MR = MC. If output is less than this amount, profit will be increased by increasing output, so a profit-maximizing firm will produce more.
B. For this firm in a perfectly competitive market, profit is maximized where Price = $24 and output = 28. At the profit-maximizing output, total revenue is $.
At the profit-maximizing output, total cost is $.
Total revenue equals Price × Output. At the profit-maximizing output, total revenue equals $24 × 28 = $672. Total cost equals ATC x Output. At the profit-maximizing output, total cost equals $18 × 28 = $504.
C. If the firm maximizes profit, it earns $ in profit.
Profit = Total Revenue minus Total Cost. If revenue = $672 and Total Cost = $504, then profit = $672 – $504 = $168. (Alternatively, using the formula Profit = (P – ATC) × Q gives ($24 – 18) × 28 = $6 × 28 = $168.)
Profit = Total Revenue minus Total Cost. If Total Revenue = $672 and Total Cost = $504, then profit = $672 – $504 = $168. Alternatively, using the formula Profit = (P – ATC) × Q gives ($24 – 18) × 28 = $6 × 28 = $168.
The presence of profits attracts new entrants into this perfectly competitive market. This shifts the market supply curve to the right. Demand does not change but there is a movement along the market demand curve.
A rightward shift in the market supply curve results in a lower equilibrium price, all else equal.