This is the Super Normal profit of the firm

This is the Super Normal profit of the firm - curve of the...

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This is the Super Normal profit of the firm. The second firm with AC 2 as its Average Cost curve is a less efficient firm. Its Average Cost curve passes from above the MR = AR curve. In an equilibrium point e2 we find MR = MC and output level is Q2 . For this output level the firm receives Total Revenue as, TR = Output × Price = OQ2e2 P Total Cost of the firm in equilibrium is, TC = Output × AC = OQ2C2R 2 Hence profits of the firms are, OQ 2C2P - OQ2C2R2 = - Pe2C2R 2 which are negative or subnormal profits. This is because the area of Total Cost is larger than the area of total profits for the second firm. Finally, there is a third firm with optimum efficiency. In this case AC 3 the average cost
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Unformatted text preview: curve of the firm is neither above nor below the MR = AR curve. The two are just tangential at point e3. The Marginal Cost curve also passes from this point and hence MR = MC. Equilibrium output is Q3 . For this output level both Total Revenue and Total Costs are equal. Hence profits of the firm are zero. TR = TC = OQ 3e3 P, TR - TC = Profits = 0 The firm is therefore making only normal profit. Note that in the case of an optimum firm in equilibrium not only MR = MC but also AR = AC. Hence in the long run, full equilibrium condition of a competitive market is that all firms should be of optimum efficiency and should make only normal profits....
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This note was uploaded on 11/26/2011 for the course ECON MICRO ec 201 taught by Professor - during the Fall '10 term at Montgomery.

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This is the Super Normal profit of the firm - curve of the...

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