Consider the diagram in the next column, which applies to a perfectly competitive firm, which at present faces a market clearing price of $20 per unit and produces 10,000 units of output per week.

a. What is the firm's current average revenue per unit?

b. What are the present economic profits of this firm? Is the firm maximizing economic profits? Explain.

c. If the market clearing price drops to $12.50 per unit, should this firm continue to produce in the short run if it wishes to maximize its economic profits (or minimize its economic losses)? Explain.

d. If the market clearing price drops to $7.50 per unit, should this firm continue to produce in the short run if it wishes to maximize its economic profits (or minimize its economic losses)? Explain.

Transcribed Image Text:

MC ATC 20.00 MR 15.75 15.00 12.50 10.00 2 7.50 5.00 AVC 8 ut 7 8.19 10 Output (thousands of units per week)