Question

At its current level of production, a firm selling sunglasses in a competitive market receives $10 for each unit it produces. The firm also faces an average total cost of $8. At the market price of $10 per unit, the firm’s profit-maximizing quantity is 500. What are the firm’s current profits? Should the firm raise of lower the price they are charging for sunglasses? What is likely to occur in this market as we move from the short run to the long run? Why?

Answer 1

What are the firm’s current profits?

Profit =(Price - ATC) *quantity

=(10-8)*500

=1000.

Should the firm raise of lower the price they are charging for sunglasses?

They can't change the price. Because, perfectly competitive firms are price taker. So they have to charge whatever the market price is. If they will charge higher price no one will buy product. And if they charge lower price, profit will decline. So they should not change price.

What is likely to occur in this market as we move from the short run to the long run? Why?

There will be zero economic profit in long run. And price will fall upto minimum ATC.

There is positive economic profit, so firm will have intensive to enter the market. Many firms will enter the market and thus price will falls and supply will shift to the right. The firms will enter until every firm earns zero economic profit.