Theory question 101
Market StructuresThe equilibrium position of a firm is illustrated in the diagram below. Study the diagram and answer the questions that follow.
(a) Determine the firm's: (i) equilibrium output level; (ii) equilibrium price.
(b) At the equilibrium output level, calculate the firm's: (i) total cost; (ii) total revenue; (iii) total profit.
(c) Is the firm operating in the long-run or short-run? Explain your answer.
(d)(i) What type of market is the firm operating in? (ii) List three features of the market type identified in d (i).
Show the model answer
(a)(i) 50 units (where MC = MR, MC rising); (ii) $40.
(b)(i) ATC at 50 units = $30: TC = 30 × 50 = $1,500; (ii) TR = 40 × 50 = $2,000; (iii) profit = 2,000 − 1,500 = $500.
(c) Short run: the firm earns supernormal profit (price above ATC); in the long run new firms would enter and remove it.
(d)(i) Perfect competition (AR = MR is horizontal).
(ii) Any three: many buyers and sellers; homogeneous product; free entry and exit; perfect knowledge; firms are price takers; perfect mobility of factors.
Equilibrium is where MC = MR; profit = (AR − ATC) × Q.