Chapter 23, Problem 3P

To determine

Consider the diagram below which is applicable to a perfectly competitive firm, which at present faces a market clearing price of $20 per unit and produces 10,000 units of output per week.

1. What is the firm’s current average revenue per unit?
2. What are the present profits of this firm? Is the firm maximizing economic profits? Explain.
3. If the market clearing price drops to $12.50 per unit, should this firm continue to produce in the short run if it wishes to maximize its economic profits (or minimize its economic losses)? Explain.

4. If the market clearing price drops to $7.50 per unit, should this firm continue to produce in the short run if it wishes to maximize its economic profits (or minimizes its economic losses)? Explain.

Concept Introduction:

Perfect competition: The perfect competition is a type of free market where there is freedom of entry and exit. Firms in the industry are selling homogenous products. The main characteristics of perfect competition are, there are many s buyers and sellers in the economy, firms have freedom of entry and exit which means at any time a new firm can enter into the market or an existing firm can leave the market.

Economic profit: The economic profit of a firm is calculated by deducting total revenue from total cost. The total costs consists of both implicit and explicit costs. Explicit cost is the ordinary costs of the firm like rent, salaries to the employees etc. On the other hand implicit cost is also known as imputed cost which describes the opportunity cost of anything.