Figure 7-5 Figure 7-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry.
-Refer to Figure 7-5.If the market price is $20,what is the amount of the firm's profit?
A) $5400
B) $6750
C) $8100
D) $16 200

Question

Figure 7-5  Figure 7-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry.
-Refer to Figure 7-5.If the market price is $20,what is the amount of the firm's profit?
A) $5400 
B) $6750 
C) $8100 
D) $16 200

Quizplus · Accepted Answer

To find the firm's profit, we need to determine the firm's quantity of output at a market price of $20. From the demand curve, we can see that at a price of $20, the quantity demanded is 225 units. From the MC curve, we can find that at a quantity of 225, the marginal cost is $20. Therefore, the firm will produce 225 units and earn a profit equal to total revenue minus total cost. Total revenue is price times quantity, or $20 x 225 = $4,500. Total cost is average total cost times quantity, or $15 x 225 = $3,375. Profit is total revenue minus total cost, or $4,500 - $3,375 = $1,125. However, this profit calculation only includes explicit costs, and we need to calculate economic profit by subtracting implicit costs (in this case, the opportunity cost of the owner's time and capital). Without more information, we can assume that economic profit is equal to accounting profit, which is $1,125 x 6 (the number of firms in the industry) = $6,750.

Figure 7-5 Figure 7-5 Shows Cost and Demand Curves