Answer to Question #184730 in Microeconomics for victor

Question

Perfect competition occurs when none of the individual market participants (buyers and sellers) can influence the price of the product. Under perfect competition, marginal revenue (MR) and average revenue (AR) are thus both equal to the market price.

The situation in which a firm makes an economic profit is identified as one of the possible short-run positions of a firm under perfect competition. Illustrate the given short-run position and explain the situation with reference to your graph.

Answer 1

In the short run, the perfectly competitive market can sometimes earn positive economic profits. In such a situation, the Price > ATC, or the minimum of ATC curve lies below the line of the price or MR. In the given graph, the shaded portion is representing the economic profits. The area of the shaded rectangle is the profit i.e 4 $\times$ 9 = $ 36