The following graph (A)represents the cost curves for a representative firm in a perfectly competitive market.The market demand is shown in graph (B):

-Refer to the above graph to answer this question.Suppose that the market demand were to increase by 2,000 units.At the new equilibrium price in this market,what will be the representative firm's total profit or loss?

Question

The following graph (A)represents the cost curves for a representative firm in a perfectly competitive market.The market demand is shown in graph (B):
 
-Refer to the above graph to answer this question.Suppose that the market demand were to increase by 2,000 units.At the new equilibrium price in this market,what will be the representative firm's total profit or loss?

Quizplus · Accepted Answer

At the current equilibrium price, the representative firm is earning zero profit as it is producing at the point where P = MC and ATC is tangent to the price line. If the market demand were to increase by 2,000 units, the new equilibrium price would be at $15 per unit. At this new price, the firm will produce where MC = P and will have an output level of 4,000 units. Its average total cost will be $10 per unit.

Total revenue = price x quantity = 15 x 4,000 = $60,000
Total cost = average total cost x quantity = 10 x 4,000 = $40,000

Therefore, total profit = total revenue - total cost = $60,000 - $40,000 = $20,000

The representative firm will earn a profit of $20,000, which is option D.

The Following Graph (A)represents the Cost Curves for a Representative