Question

At its current level of production, a profit-maximizing firm in a competitive market receives $12.50 for each unit it produces and faces an average total cost of $10. At the market price of $12.50 per unit, the firm's marginal cost curve crosses the marginal revenue curve at an output level of 1000 units. What is the firm's current profit? What is likely to occur in this market, and why?

Answer 1

2500

Explanation:P = 12.5

ATC = 10

Qmax = 1000

Profit = (P – ATC) x Q = (12.5 – 10) x 1000 = 2500

Answer 2

$2,500

Step-by-step explanation:

P = 12.5

TR = P × Q

= $12.5 × 1,000 units

= 12,500

TC = ATC × Q

= $10 × 1,000 units

= 10,000

Profit = TR - TC

= $12,500 - $10,000

= +2,500

Profit is positive, but for perfectly competitive markets there will be no [economic] profits at all in the long-run.

So, in this markets new firms will enter market attracted by profits thus increasing market supply and reducing price to 10.