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(Microeconomics) - Assignment Example

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Question 1 The farmer is not maximizing his profit because marginal revenue (Price = 22 cents) is not equal to marginal cost (MC =30 cents) of producing sugar at the given level. Since marginal cost increases by increasing the quantity produced, the farmer should producer lesser than 100,000 pounds and decrease the sugar production up to the level where marginal cost cuts back to equal the price i.e…
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Assignment (Microeconomics)
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Download file to see previous pages... But since increase in quantity produced raises marginal cost, producer of butter would raise its price to keep up with the increased marginal cost (to maximize profit). Thus, price begins to rise. Now, if the demand for butter drops, producer would cut their production and thus the marginal cost again decreases and they can lessen the price too because now the profit maximizing condition (MR = MC) can be satisfied at the lower price. Question 3 In a perfectly competitive industry, economic profits disappear in the long run because entry and exit of a firm is free of barriers which allows the number of firms to remain up to the level of zero economic profits as opposed to an imperfectly completive industry where entry barriers prevent other firms from entering the industry and thus from exhausting the profits. For a perfectly competitive industry, economic profit attracts the new suppliers in the market as they can freely enter. New entries is continued until ATC = price. This is because if ATC > price (positive profit), more firms will enter and thus absorb the profit and if ATC < price, firms will shut down in long run (as exit is also free in perfect competition) to avoid the economic loss and thus price and ATC again becomes equal – zero economic profit. Question 4 Suppose the firm is a profit-maximizing firm. ...Download file to see next pagesRead More
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