The above diagram illustrates the short run cost curves for Sarah Mat, a rice farmer in Queensland. Calculate the profit or loss for Sarah Mat and, examine the key characteristics for perfect competition firm with reference to Sarah’s farm
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The profit of Sarah Mat is $3500.
Explanation:
The profit-maximizing level of a perfectly competitive firm is AR = MR.
So, the equilibrium point will exist at the intersection of average revenue and marginal revenue curve. Therefore, the corresponding quantity of 500 rice bags is the profit-maximizing output. However, in the diagram, it can be seen that ATC is below the price. So, the firm is earning profit and from the ATC curve we can determine the ATC = 33.
Profit = Total revenue – Total cost
Profit = P x Q – ATC x Q
Profit = 40 x 500 – 33 x 500
Profit = 20000 – 16500
Profit = $3500
Learn More:
Why is a profit and loss statement useful for a business?
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