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Microeconomics help?

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I need some help with this question. Any help and or explination of your answer would be greatly appreciated.

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?

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2 ANSWERS


  1. profit=A$2500....entry into the market by other firms until the price goes down to $10.


  2. P=12.5

    TR=P*Q = 12.5 * 1'000 = 12'500

    TC=ATC*Q = 10 * 1'000 = 10'000

    Profit=TR-TC = 12'500 - 10'000 = +2'500

    Profit is positive, but for perfectly competitive markets there will be no 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 equilibrium price till it reaches close to P=$10, consequently leading to zero economic profits in long-run. For lower price this firm will be pressed to reduce output a bit for new P=MR=MC equilibrium.
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