Assignment (Microeconomics) Example | Topics and Well Written Essays - 500 words

(Microeconomics) - Assignment Example But since increase in quantity produced raises marginal cost, producer of butter would raise its price to keep up with the increased marginal cost (to maximize profit). Thus, price begins to rise. Now, if the demand for butter drops, producer would cut their production and thus the marginal cost again decreases and they can lessen the price too because now the profit maximizing condition (MR = MC) can be satisfied at the lower price. Question 3 In a perfectly competitive industry, economic profits disappear in the long run because entry and exit of a firm is free of barriers which allows the number of firms to remain up to the level of zero economic profits as opposed to an imperfectly completive industry where entry barriers prevent other firms from entering the industry and thus from exhausting the profits. For a perfectly competitive industry, economic profit attracts the new suppliers in the market as they can freely enter. New entries is continued until ATC = price. This is beca use if ATC > price (positive profit), more firms will enter and thus absorb the profit and if ATC < price, firms will shut down in long run (as exit is also free in perfect competition) to avoid the economic loss and thus price and ATC again becomes equal – zero economic profit. Question 4 Suppose the firm is a profit-maximizing firm.