Question

• Beginning at a normal profit position, use graphs to Illustrate how the perfectly competitive firm's revenues and profit position can be altered due to a change in the industry equilibrium. Graph a change from the zero economic profit position ( normal profit position) to a loss and from the zero economic position to an economic profit - use 2 separate graphs

Answer 1

A . normal profit graph

B .firm incurring profit

Remember that the area of a rectangle is equal to its base multiplied by its height. The farm’s total revenue at this price will be shown by the large shaded rectangle from the origin over to a quantity of 80 packs (the base) up to point E' (the height), over to the price of $10, and back to the origin. The average cost of producing 70 packs is shown by point C or about $7. Total costs will be the quantity of 70 times the average cost of $7, which is shown by the area of the rectangle from the origin to a quantity of 80, up to point C, over to the vertical axis and down to the origin. It should be clear from examining the two rectangles that total revenue is greater than total cost. Thus, profits will be the shaded rectangle on top.

It can be calculated as:

profit=

=total revenue−total cost

=(80)($10)−(80)($7)= $240

C. firm incurring loss.

the market price has fallen still further to $2.00 for a pack of frozen raspberries. At this price, marginal revenue intersects marginal cost at a quantity of 50. The farm’s total revenue at this price will be shown by the large shaded rectangle from the origin over to a quantity of 50 packs (the base) up to point E” (the height), over to the price of $2, and back to the origin. The average cost of producing 50 packs is shown by point C” or about $3.30. Total costs will be the quantity of 50 times the average cost of $3.30, which is shown by the area of the rectangle from the origin to a quantity of 50, up to point C”, over to the vertical axis and down to the origin. It should be clear from examining the two rectangles that total revenue is less than total cost. Thus, the firm is losing money and the loss (or negative profit) will be the rose-shaded rectangle.

The calculations are:

profit=(total revenue– total cost)

= (50)($2.00)–(50)($3.30)=–$77.50

Or:

profit= (price–average cost) × quantity

($1.75–$3.30) × 50= –$77.50

so, the market price received by a perfectly competitive firm leads it to produce at a quantity where the price is greater than average cost, the firm will earn profits. If the price received by the firm causes it to produce at a quantity where price equals average cost, which occurs at the minimum point of the AC curve, then the firm earns zero profits. Finally, if the price received by the firm leads it to produce at a quantity where the price is less than average cost, the firm will earn losses