Question

1. Figure 1 shows the output, cost and revenue position of a business producing tissue paper. Study the diagram and answer the questions that follow:
(a) Determine the firm's equilibrium price and output.
(b) Which of the curves represents the market's demand curve? Give a reason for your answer.
(c) In what market is the firm operating? Give a reason for your answer.
(d) At the profit-maximizing level of output, identify the areas that represent: (i) total revenue; (ii) total cost; (iii) profit or loss.
(e) What is the implication of the profit or loss earned on the market in (d)(iii)?

Accepted Answer

(a) The firm is in equilibrium where MC = MR, at the output level where the two curves intersect. Equilibrium price and output are read off from where this intersection meets the price and quantity axes.

(b) The market demand curve is the AR (= MR) curve, because in this market the price line is horizontal and represents both average revenue and marginal revenue.

(c) The firm is operating in a perfectly competitive market, because it is only under perfect competition that the AR curve equals the MR curve (a horizontal, price-taking demand curve).

(d) (i) Total revenue is the rectangle formed by price multiplied by the equilibrium output. (ii) Total cost is the rectangle formed by average cost multiplied by the equilibrium output. (iii) Profit or loss is the shaded rectangle representing the difference between the total revenue and total cost rectangles.

(e) Since in this case total cost exceeds total revenue (a loss situation), the implication is that in the long run the firm will be forced to shut down if it is unable to cover its variable costs.

WAEC Economics 2025 Theory — Question 1

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