Suppose that Bob produces electric bikes in a competitive market. For simplicity, assume that there are...

Suppose that Bob produces electric bikes in a competitive market. For simplicity, assume that there are no fixed costs to produce e-bikes. Illustrate two graphs side by side. On left- hand side graph, present the firm. On the right-hand side graph, present the corresponding market. For the firm draw a smooth U-shaped average cost curve and a corresponding marginal cost curve. For the market, draw a demand curve and short-run supply curve that provides positive economic profit for the firm. Illustrate those positive profits on the firm’s graph. Also, show the long-run supply curve that would result.

Expert Solution

Bob produces electric bikes in a competitive market. There are no fixed costs to produce e-bikes. Competitive firm is a price taker .Price in competitive industry would determine the supply and demand forces in the industry. . Price of product is determined by the market demand curve and market supply curve when they are equal.The determined price of industry is taken by the firm. Therefore ,firm is a price taker .Right hand side graph shows the price determination of competitive industry . Demand curve Dd and supply curve Ss determine the price level P1 in the market where the firm can attain positive economic profit. Left side graph shows he equilibrium of firm and positive economic profit of ( super normal profit) . A competitive firm faces a horizontal demand curve and average revenue curve, because there is only one price.That is price=average revenue = marginal revenue. Demand curve faced by competitive firm is perfectly elastic. AR curve of a seller is the demand curve of buyer. Firm maximizes profit when its marginal cost curve cuts marginal revenue curve Below. Firm attain positive economic profit when average cost would be less than average revenue of firm. Average cost curve will be less than average revenue curve. The positive economic profit is the shaded rectangle PABC The long run supply curve of firm will be rising portion of MC curve from minimum long run AC curve. Long run supply curve of industry is negatively sloped due to decreasing cost condition .Because average cost is less than average curve.

Rahul Sunny answered 2 years ago

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