Question

1(a)-(c) [SECTION A — Compulsory] The diagram below represents the equilibrium position of a firm in a perfectly competitive industry. Study it carefully and answer the questions that follow.
(a)(i) At what level of output and prices 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. [Total: not specified]

Accepted Answer

(a)(i) A firm is in equilibrium at the level of output and price where MR = MC. At this level, output = 50 kg while price = $20.
(ii) Profit = Revenue − Cost. Revenue = 50 × $20 = $1000. Cost = $12 × 50 = $600. Profit at equilibrium = $1000 − $600 = $400.
(iii) This is abnormal (economic/supernormal) profit, because the profit is earned at a point where price (AR) is greater than average cost (AC).
(b) The AR function is horizontal because the firm operates in a perfectly competitive industry. In perfect competition, firms are price takers, so the price (AR) they receive is fixed regardless of the quantity they sell.
(c) (i) When MC is less than ATC, ATC is falling. (ii) When MC equals ATC, ATC is at its minimum. (iii) When MC is greater than ATC, ATC is rising. (Any two of these.)

WAEC Economics 2019 Theory — Question 1

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