Question

2.   Draw the AVC, ATC, MR, and MC curve for a perfectly competitive firm. Assume that the equilibrium price is $720 and the equilibrium quantity (for the firm) is 990. At the equilibrium quantity of 990 the ATC curve is equal to $680. Is this firm making a profit or a loss? Calculate the profit or loss.

Answer 1

Following graph shows the AVC, ATC, MR, and MC curve of a perfectly competitive firm -

Equilibrium Price = $720 per unit

Equilibrium quantity = 990 units

ATC = $680

Price is greater than ATC at equilibrium. When price is greater than ATC at equilibrium then in that case firm makes profit.

So, this firm is making a profit.

Calculate Profit -

Profit = (Equilibrium Price - ATC) * Equilibrium quantity = ($720 - $680) * 990 = $40 * 990 = $39,600

The profit is $39,600.