Question 1
The diagram below represents the equilibrium position of a firm in a perfectly competitive industry. Study it and answer the questions that follow.
(a) (i)At what level of output and price is the firm in equilibrium?
(ii)Calculate the firm’s profit in equilibrium.
(iii) What type of profit is it? Explain your answer.
(b) Why is the average revenue (AR) function horizontal?
(c) State any two ways in which marginal cost (MC) and average total cost (ATC) are related.
This is one of the data response question and it was attempted by few candidates. The question required to determine the level of output and price at which the firm is in equilibrium, the firm’s profit and the relationship between marginal cost (MC) and average total cost (ATC). Most candidates were able to determine the level of output and price at which the firm is at equilibrium but only few of them were able to identify the type of profit made and the relationship between MC and ATC in the (a)(iii) and (c) parts of the question respectively. This prevented them from obtaining the maximum mark.
(iii) Abnormal/economic/supernormal profit. This is because the profit is earned at a point where price (AR) is greater than AC.
(b) The average revenue function is horizontal because in perfect competition, AR which is also the price is constant/fixed.
(c) (i) When MC is less than ATC, ATC is falling.
(ii) When MC is equal to ATC, ATC is at its minimum.
(iii)When MC is greater than ATC, ATC is rising.