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Assume Frank Sugar Co. is earning zero economic profit. Draw correctly labeled s...

Oct 30, 2023

Assume Frank Sugar Co. is earning zero economic profit. Draw correctly labeled side-by-side graphs for the sugar market and Frank Sugar Co. and show each of the following. (i) The market equilibrium price and quantity, labeled PM and QM respectively (ii) The profit-maximizing price and quantity for Frank Sugar Co., labeled PF and QF, respectively

answer: (i) The market equilibrium price and quantity, labeled PM and QM respectively (ii) The profit-maximizing price and quantity for Frank Sugar Co., labeled PF and QF, respectively

Key Concept

In microeconomics, market equilibrium refers to the point where the quantity demanded by consumers equals the quantity supplied by producers, resulting in no shortage or surplus. Profit-maximization for a firm occurs when marginal revenue equals marginal cost.

Explanation

(i) The market equilibrium price (PM) and quantity (QM) can be determined by the intersection of the demand and supply curves in the sugar market graph. The price at this point represents the market-clearing price, where the quantity demanded by consumers equals the quantity supplied by producers. (ii) The profit-maximizing price (PF) and quantity (QF) for Frank Sugar Co. can be determined by the intersection of the firm's marginal revenue (MR) and marginal cost (MC) curves in the Frank Sugar Co. graph. At this point, the firm maximizes its profits by producing the quantity (QF) where MR equals MC. The corresponding price (PF) can be found on the demand curve at the quantity QF.

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