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Question 1 (10 Marks)
The following graph represents the situation of Sindbad’s caps, a firm selling caps in the perfectly
competitive caps industry.
1) How much output should Sindbad produce to maximize his profit, if the market price is equal
to $11? (2 marks)
2) How much profit (loss) will he earn? (2 marks)
3) Indicate the profit (loss) area on the graph. (2 marks)
4) Find the fixed cost paid by the firm. (2 marks)
5) Suppose Sindbad decides to shut down. What would his loss be? (2 marks)
1. Because the firm is in a perfectly competitive market, the profit maximizing output is
determined by the output at which the marginal cost is equal to the marginal revenue (MC =
MR) which is the MR = THE PRICE. So, at price 11, Sindbad’s profit maximizing output is
2. First, at Q = 100 the ATC = 9 and P = 11
P = 11 > ATC = 9, and this is implyi...
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