Economic environment is important to a firm’s ability to make profits. Every firm will maximize profits...

Economic environment is important to a firm’s ability to make profits. Every firm will maximize profits by operating at the minimum point of its average total cost curve. Is this statement true or false? Explain using diagrams for different market models. Which market model necessitate this condition?

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Expert Solution

The statement is false.

The statement is applicable for perfectly competitive market in the long-run. In case of other market it may happen or may not happen.

ATC would be the minimum where MC cuts ATC.

The perfectly competitive market in the long-run necessitates the condition.

Perfectly competitive market (short-run The profit-maximizing stage is (P MC), which happens at E point. ATC is not the minimum here; it is the minimum at L point, since MC cuts at this point. MC Price ↑ ATC -AR (Demand)-MR P1 Output The profit-maximizing stage of operation (Q) is not at the minimum of ATC, L. Therefore, this statement is not true.

A perfectly competitive firm is allocatively and productively efficient in the long-run. Therefore, profit-maximization happens at (P = MC = Minimum of ATC) MC ce ATC -AR (Demand) MR 2 Output Point E is equilibrium, where ATC is the minimum. At this point OQ quantity is produced at OP price and the firm earns normal profit.

Monopolv market: Since the firm has monopoly power in this market, it can set price at any level; but the profit-maximizing stage appears at (MC = MR), where ATC may be the minimum or not. It happens both in long run and short run. MC Demand-AR Output MR The equilibrium point is E. At this point OQ quantity is produced at OP price. The shaded portion is profit. ATC is not the minimum here.

Rahul Sunny answered 1 year ago

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