Use the figure below,which shows the linear demand and constant cost conditions facing a firm with a high barrier to entry,to answer the question. The firm will earn economic profit of $______.

Question

Use the figure below,which shows the linear demand and constant cost conditions facing a firm with a high barrier to entry,to answer the question.  The firm will earn economic profit of $______.

Quizplus · Accepted Answer

To find the economic profit for the firm, we need to find the point where the demand curve (D) intersects with the marginal cost curve (MC). This point is at a quantity of 5,000 units and a price of $5. At this point, the average total cost (ATC) curve is at $3. Therefore, the firm's profit per unit is $2 ($5 - $3). The firm is producing 5,000 units, so its total revenue is $25,000 ($5 x 5,000). Its total cost is $15,000 ($3 x 5,000). Therefore, the firm's economic profit is $10,000 per unit x 5,000 units = $50,000. But we need to add the fixed cost of $1,200,000 to this to get the total economic profit, giving us $1,250,000 (Option D).

Use the Figure Below,which Shows the Linear Demand and Constant