CFA Practice Question

CFA Practice Question

All firms in a competitive industry have identical cost and production schedules.

Quantity | Marg Cost | Total Cost | Avg Cost
1 | 53 | 60 | 60
2 | 32 | 113 | 56.5
3 | 26 | 145 | 48.33
4 | 21 | 171 | 42.75
5 | 19 | 192 | 38.4
6 | 20 | 211 | 35.17
7 | 27 | 231 | 33
8 | 30 | 258 | 32.25
9 | 32 | 288 | 32
10 | 40 | 320 | 32
11 | 50 | 360 | 32.73
12 | 65 | 410 | 34.17

Suppose the market was initially in competitive equilibrium. Then, due to a rise in demand, the price in the market for one unit rises to $55 (market not in competitive equilibrium). In the short run:
A. Whether the firms in the industry have positive or negative profits depends upon whether marginal cost is greater than total cost.
B. Firms in the industry will have negative profits.
C. Firms in the industry will have positive profits.
Explanation: As the market is competitive, the price prevailing at equilibrium before the rise in demand must be 32 (point where average cost = marginal cost). An increase in price to 55 will in the short run result in existing firms making positive economic profits as in the short run new firms do not enter the market.

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