At its current level of production a profit-maximizing firm in a competitive market receives $10 for...

At its current level of production a profit-maximizing firm in a competitive market receives $10 for each unit it produces and faces an average total cost of $12.50. At the market price of $10 per unit, the firm's marginal cost curve crosses the marginal revenue curve at an output level of 1,000 units. What is the firm's current profit? What is likely to occur in this market and why? Please explain.

Expert Solution

P=10

TR=P*Q = 10 * 1000 = 10,000

TC=ATC*Q = 12.5 * 1000 = 12500

Profit=TR-TC = 10000 - 12500 = -2500

So,firm is incurring loss. As a result,some firms will exit the market in the long run which will lead to a fall in market supply and therefore a rise in price. Price will continue to rise until it becomes equal to 12.5.

Rahul Sunny answered 2 years ago

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