Atmos enterprises produces watches in a perfectly competitive market. Its cost and revenue curves are shown in this graph.

What quantity will this firm produce, and what price will it charge, in the short run?

Choose 1 answer:
(A) $Q=8000 ; P=\$ 75$
(B) $\mathrm{Q}=8000 ; \mathrm{P}=\$ 48$
(C) $Q=6000 ; P=\$ 48$
(D) $Q=6000 ; P=\$ 80$
(E) This firm will shut down

Question

Atmos enterprises produces watches in a perfectly competitive market. Its cost and revenue curves are shown in this graph.

What quantity will this firm produce, and what price will it charge, in the short run?

Choose 1 answer:
(A) $Q=8000 ; P=\$ 75$
(B) $\mathrm{Q}=8000 ; \mathrm{P}=\$ 48$
(C) $Q=6000 ; P=\$ 48$
(D) $Q=6000 ; P=\$ 80$
(E) This firm will shut down

Accepted Answer

∻Solution∻ ‖ a ⋮ Identifying Profit Maximization Point: In a perfectly competitive market, a firm maximizes profit where Marginal Cost (MC) equals Marginal Revenue (MR), which is also the price (P). ‖ ‖ b ⋮ Determining Short-Run Production Quantity: The firm will produce at the quantity where MC intersects D = MR, which is at the point of 8,000 watches. However, this does not consider the firm's profitability at this quantity. ‖ ‖ c ⋮ Assessing Profitability: To determine if the firm should produce, we compare the price (D = MR) with the Average Total Cost (ATC) at the quantity of 8,000. If P < ATC, the firm incurs a loss and should not produce that quantity. ‖ ‖ d ⋮ Finding the Shutdown Point: The firm will shut down if the price is below the Average Variable Cost (AVC) at the profit-maximizing quantity. The shutdown point is where MC intersects AVC, which is at 3,000 watches and a cost of $25. ‖ ‖ e ⋮ Determining the Short-Run Price and Quantity: Since the firm is a price taker, it will charge the market price, which is where D = MR intersects MC. The firm will produce at the quantity where MC intersects ATC at the lowest point to minimize losses or maximize profits, which is at 6,000 watches and a cost of $48. ‖ ∻Answer∻ ⚹ C) $Q=6000 ; P=\$48 ⚹ ∻Key Concept∻ ⚹ Short-Run Equilibrium in Perfect Competition ⚹ ∻Explanation∻ ⚹ In the short run, a perfectly competitive firm will produce where MC = MR and will charge the market price, which is equal to MR. The firm will not produce at a quantity where price is less than ATC to avoid losses. ⚹◊What is the relationship between marginal cost, average total cost, and quantity produced in a perfectly competitive market?⍭ Generate me a similar question◊

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