Question
Asked Mar 10, 2020
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Draw a diagram illustrating the case of a perfectly competitive business firm making a profit. label the demand curve D, the marginal revenue curve MR, the marginal cost curve, MC and the average total cost curve ATC. Show the quantity the firm it will choose to produce and the price it will charge and mark those as Q1 and P1 respectively.

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Expert Answer

Step 1

A market is a place where the buyers and the sellers interact with each other and the exchange of goods and services takes place between them at a mutually agreed price level. The perfect competition is a market condition in which there are a really large number of buyers and sellers exist in the market and the products are homogenous. There will be absence of advertisement cost and any other costs in the economy. There will be zero market control for the firm and this means that the firms will be price takers and earning normal profits only. There will be freedom of entry and exit into the market and from the market which helps to keep the profits at the normal level only in the perfect competition.

Step 2

The perfect competition is a market where there will be only normal profits existing in the market. The normal profit is the level of revenue which is sufficient to cover the costs and the remaining still make the firm competitive in the market. The presence of normal profit indicates that the economic profit will be zero under perfect competition. The profit will be maximized at the point where the marginal revenu...

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