Suppose Bella's Belt Barn operates in a perfectly competitive market and is producing its profit-maximizing level...

Suppose Bella's Belt Barn operates in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production, Bella's average total cost of producing belts is $22.50, average variable cost is $21.30, and marginal cost is $21.70. At this moment, Bella is earning _____ economic profits. Over time, everything else held constant, the price of belts in this market will _____.

Solutions

Expert Solution

In perfectly competitive market, profit maximizing condition is:

Price= Marginal Cost

Price= $21.70

Economic profits= (Price-average total cost) x Quantity

Economic profits= ($21.70-$22.50) x Quantity

Economic profits= -0.80 x Quantity < 0

Economic profit is negative as quantity is always positive.

At this moment, Bella is earning negative economic profits. Over time, everything else held constant, the price of belts in this market will $21.70

Rahul Sunny answered 1 year ago

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