Consider a firm which experiences increasing returns for output from zero units to 10,000 units and experiences diminishing returns for all output in excess of 10,000.

Consider a firm which experiences increasing returns for output from zero units to 10,000 units and experiences diminishing returns for all output in excess of 10,000. Draw the short run ATC(Q), AVC(Q) and MC(Q) curves for this firm. Assume the firm is a price taking firm. Identify a price where the firm is making a positive econo-mic pro¬fit (P1), a price where the firm is making zero economic profit (P2), a price where the firm is earning a loss but continues to operate in the short run (P3), and a price which is above the minimum point on MC(Q) but nevertheless compels the firm to shutdown (P4).

a. Iden¬tify the firm's profit maximizing output when price is equal to P1.

b. Geometrically identify the firm's profits when price is equal to P1.

c. Geometrically identify the firm's variable cost at the profit maximi¬zing level of output for price equal to P1.

d. Geometrically identify the firm's fixed cost at the profit maximizing level of output for price equal to P1.

Expert Solution

Rahul Sunny answered 2 years ago

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