Answer:
Step-by-step explanation:
(a) To draw the graph accurately, we need to plot the marginal cost (MC), marginal revenue (MR), average variable cost (AVC), and average total cost (ATC) on the y-axis, and the quantity produced on the x-axis.
- The marginal cost (MC) is given as $7. We plot a point on the graph at $7 for the MC curve.
- The marginal revenue (MR) is also given as $7. We plot a point on the graph at $7 for the MR curve.
- The average variable cost (AVC) is given as $4. We plot a point on the graph at $4 for the AVC curve.
- The average total cost (ATC) is given as $6. We plot a point on the graph at $6 for the ATC curve.
Connect the points to form the MC, MR, AVC, and ATC curves. The profit-maximizing quantity (Qpm) is the quantity at which MR equals MC. Label this point on the graph.
(b) To determine the profit-maximizing level of production, we need to find the quantity at which marginal revenue (MR) equals marginal cost (MC). In this case, MR is given as $7 and MC is also given as $7. So, the profit-maximizing level of production is the quantity where MR and MC intersect on the graph. This is the point labeled Qpm.
(c) If the average total cost (ATC) is $5 at the point where MC equals AVC, we can find the average fixed cost (AFC) at that point by subtracting the average variable cost (AVC) from the average total cost (ATC). In this case, AFC = ATC - AVC = $5 - $4 = $1.
(d) To determine if the firm is earning economic profit or incurring a loss, we compare the price (which is given by MR) with the average total cost (ATC). If the price is greater than the ATC, the firm is earning economic profit. If the price is less than the ATC, the firm is incurring a loss. In this case, the price (MR) is $7 and the average total cost (ATC) is $6. Since $7 > $6, the firm is earning economic profit.
(e) On the graph, shade the area above the ATC curve and below the MR curve. This shaded area represents the firm's economic profit.
Hope this helps.