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Homework answers / question archive / Profit maximization in the cost-curve diagram Suppose that the market for candles is a competitive market

Profit maximization in the cost-curve diagram Suppose that the market for candles is a competitive market

Economics

Profit maximization in the cost-curve diagram Suppose that the market for candles is a competitive market. The following graph shows the daily cost curves of a firm operating in this market.In the short run, at a market price of $20 per candle, this firm will choose to produce candles per day. On the previous graph, use the blue rectangle (circle symbols) to shade the area representing the firm's profit or loss if the market price is $20 and the firm chooses to produce the quantity you already selected. Note: In the following question, you should enter a positive number in the numeric entry field. The area of this rectangle indicates that the firm's would be per day.

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In a competitive market individual price does not influence the market. Hence it is a horizontal line. Price remains equal to marginal revenue and average revenue. In short run to maximise profit firm chooses that unit to produce where price is equal to marginal cost. Hence the condition is

P=MC

It is given thatmarket price id $20 then we can say that firm will produce 9 candels at point C. It is shown in the following diagram:

Now

profit=TR-TC

At market price $20 TR= 20*9=$180

On the other hand at this price average total cost is $16 and hence total cost would be

TC=ATC* unit of production

TC=16\times 9

TC=\$ 144

Therfore

\prod =TR-TC

\prod =180-144

  =36

Hence per day proft be $36

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