Question

Suppose the cell phone industry is purely competitive and consists of 1,000 identical firms. Each firm is maximizing total profit by producing 100 phones and selling them at a price of $50 each. The per unit profit is $8 per phone.

Assume the firms have normal-shaped curves and minimum ATC is 40 at 75 units. The minimum AVC is 30 at 50 units.

a. Draw graphs representing the industry (market) and representative firm. Show on the industry graph market supply S, and market demand D. On the firm graph show ATC, AVC, MC, P, short run firm supply curve (SRS), break even point (BE), shut down point (SD), and the profit region.

FIRM   INDUSTRY (MARKET)

b. What is the total profit per firm? _____________________

c. On the graphs, above, show what would happen in the long run (in terms of entry and exit

   only) and describe it below.

Answer 1

a) SRS curve shows as the MC curve above the SD point ( means area of MC curve above SD point).

Break even point is where MC = ATC means ATC is minimum.

shut down point is where AVC is minimum at point SD in the graph

Profit region is the green rectangle

b) Total profit per firm = area of green rectangle = (50-42)*100 = $800

( in other ways we can say that as per unit profit is $8 so total profit is per unit profit* quantity = 8*100 = $800)

c) In the long run, the positive economic profit vanish as new firms enter due to this profit and as new firms enter supply curve shift rightward in the long run From S to S1 and price falls to minimum ATC means $40 which leads to zero economic profit in the long run.