QUESTION SIX (20 Marks) 6.1 Using marginal cost (MC), marginal revenue (MR), average cost (AC) curves...

QUESTION SIX
6.1 Using marginal cost (MC), marginal revenue (MR), average cost (AC) curves in an appropriate diagram, illustrate and explain how a firm can make abnormal profits.

My subject is ECONOMICS

Solutions

Expert Solution

we can analyze the concept by taking perfect competition situation in the market.

in perfect competition the industry sets the price and all the firms have to accept the price.none of the firm can change the price or influence the price.
in short run,if the demand for the product increases then the firm will increase the price but the cost to produce the product would remain same.it means the firm would be able to produce the good at existing cost but sell the product at increased price.this difference (shaded area in diagram) would be considered as abnormal profit or super normal profit.
remember there is no barrier of entry and exit therefore this situation would encourage the new firms to do business and they would keep coming till each firm is again earning the normal profit

therefore above example is only suitable in case of short run.

Rahul Sunny answered 2 months ago

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