Question

A firm under perfect competition is able to sell its product at a price of ₹ 80. It incurs a cost of ₹ 65 per unit in the short run.

What type of situation is experienced by the firm here? Show it in a diagram.

Answer 1

The firm is earning a short-run supernormal (abnormal) profit because the market price (P = ₹ 80) exceeds the firm’s average cost (AC = ₹ 65), so profit per unit = ₹ 80 − ₹ 65 = ₹ 15; the firm produces where MR (P) = MC to maximize profit, and total profit = (P − AC) × Q.