Rambutan is a fruit prized in Eastern Asia for its unique hairy look. Once peeled, it reveals a sweet, slightly sour, grape-like, gummy-tasting fruit. The graph shows a perfectly or (purely) competitive rambutan farmer. MC MR A $12.11 ATC This firm is incurring a In the long run, 10.11 9.51 B firms will this market. What is this firm’s profit or loss, rounded to the nearest penny? 5.4 7 Quantity (bushels) $ If the market price fell to $9.51, then this firm would be making zero economic profit. this firm would be making an economic profit. this firm would be at its shut down price. this firm would be incurring a loss.
The correct answer and explanation is:
To calculate the profit or loss for the rambutan farmer in the short run, we need to first understand the relevant economic terms and the graphical details provided.
Key Terms:
- MC (Marginal Cost): The additional cost incurred by producing one more unit of output.
- MR (Marginal Revenue): The additional revenue gained by selling one more unit of output.
- ATC (Average Total Cost): The total cost per unit of output, including both fixed and variable costs.
- Price: The price per unit at which the firm sells its output.
- Profit or Loss: The difference between total revenue (TR) and total cost (TC).
Analysis of the Situation:
- Market Price: The price at which the farmer can sell each bushel of rambutan is $12.11. This is assumed to be the price that the market is offering under conditions of perfect competition.
- ATC: The firm’s average total cost is $10.11 per bushel.
- MC = MR: In a perfectly competitive market, firms adjust their production to the point where marginal cost (MC) equals marginal revenue (MR). The graph implies that the firm is operating at the equilibrium point where MC = MR, indicating that it is maximizing its profit or minimizing its loss.
Calculating Profit or Loss:
- Total Revenue (TR) = Price × Quantity. If the market price is $12.11 and the firm sells a certain number of bushels, total revenue is $12.11 times the number of bushels sold.
- Total Cost (TC) = ATC × Quantity. If the ATC is $10.11, total cost is $10.11 times the number of bushels produced.
Since the price of $12.11 is greater than the ATC of $10.11, the firm is making a profit on each bushel of rambutan it sells. The profit per bushel is:
- Profit per bushel = Price – ATC = $12.11 – $10.11 = $2.00.
Thus, the firm is making an economic profit of $2 per bushel of rambutan.
Long-Run Adjustment:
In the long run, if the firm continues to make an economic profit, other firms will be attracted to the market due to the possibility of earning similar profits. As more firms enter the market, the supply of rambutan increases, driving the market price down. This will eventually reduce the profit until it reaches zero economic profit. If the price falls to $9.51, the firm’s average total cost (ATC) matches the market price, and it would no longer earn any profit. It would be making zero economic profit.
Conclusion:
- In the short run, the firm is making an economic profit of $2 per bushel.
- If the price drops to $9.51, the firm would make zero economic profit.
- If the market price fell below $9.51, the firm would begin incurring losses and could potentially be forced to shut down if it cannot cover its variable costs.
Thus, the firm is currently making an economic profit, but this will not last in the long run as competition drives the price down to the point where economic profit equals zero.