A firm in a perfectly competitive market will produce no output in the short run if the price is below $20 but will produce if the price is above $20.

A firm in a perfectly competitive market will produce no output in the short run if the price is below $20 but will produce if the price is above $20. The smallest quantity they will produce in the short run is 6. Firms will earn 0 economic profit if the price is $447.5 and its profit maximizing quantity is 21 at that price. The firm’s fixed cost is $6615. Assume the good can be produced in continuous quantities.

Draw a picture of the MC, ATC, and AVC for this firm specifically labeling the values for each of these costs at q = 21 and q = 6. Round any decimal answers to 1 place. The diagram does not need to be to scale but needs the curves to exhibit the correct qualities.

Expert Solution

The below diagram shows the price, MC, ATC and AVC. It can be seen from the diagram that when the price is $20 the quantity demanded is 6 units. When the price of $447.5 the profit is maximised. If firm will produce beyond this point all the costs tends to rise. The firm maximize profit by producing the quantity at which marginal cost equals marginal revenue.

Rahul Sunny answered 2 years ago

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