The above figure shows the cost curves of a profit-maximizing perfectly competitive firm. If the price equals $7,
a) how much will the firm produce?
b) how much is the firm's average total, average variable, and marginal costs?
c) how much is the firm's total, total variable, and total fixed costs?
d) how much is the firm's total revenue and economic profit?
e) what will happen in this market in the long run?
a) The firm will produce 40 units of output because that is where the marginal revenue equals the marginal cost.
b) The firm's average total cost equals $4, its average variable cost equals $3, and its marginal cost equals $7.
c) The firm's total cost is $160 (= $4 × 40 ), its total variable cost is $120 (= $3 × 40 ), and its total fixed cost is $40 (= $160 - $120 ).
d) The firm's total revenue is $280 (= $7 × 40 ) and its economic profit is $120 (= $280 - $160 ) .
e) In the long run, firms will enter the market in response to the economic profit. The market supply curve will shift rightward, the price will fall, and the economic profit will be eliminated.
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