Chapter 58, Problem 1FRQ

To determine

The graph that shows a profit-maximizing perfectly competitive firm producing at its minimum average total cost.

Explanation of Solution

The following graph shows a perfectly competitive firm that is experiencing profit-maximizing while producing at its minimum average total cost.

  

In this graph, the horizontal axis represents the quantity and the vertical axis shows the price and cost of the unit.

The horizontal line in the mid of the graph shows demand, marginal revenue, and price which is labeled by MR = P = D. The marginal cost curve is in a swoosh shape which slopes upward and is labeled by MC on the graph.

The average total cost curve is in a U-shape which is labeled by ATC on the graph. Moreover, the quantity is determined on the graph where marginal cost and marginal revenue are equal (MC = MR).

At the level of output where profits are maximized, the average total cost falls to its lowest point.

Economics Concept Introduction

Introduction: The market structure can be determined by a number of factors such as the number of buyers, sellers, competition, and barriers or freedom to enter or exit. Because perfectly competitive firms are forced to accept the market's current equilibrium price by pressure from other firms, and therefore, they are price takers.