Question

Use a graph to demonstrate the circumstances that would prevail in a competitive market where firms are earning economic profits. At its current level of production a profit-maximizing firm in a competitive market receives price of $12.50 per unit, and faces an average total cost of $10. At the market price of $12.50 per unit, the firm's marginal cost curve crosses the marginal revenue curve at an output level of 1000 units. What is the firm's current profit? Can this profit be maintained in the long run? Carefully explain your answer.

Answer 1

Firms profit is (12.5-10)*1000=2500 $

The profit can't be in long run as onother firms are attracted to profitable activity, thus new firms will enter the market, so the supply will increase and the profit will be 0.