Answer to Question #76657 in Microeconomics for Hasnain

Question

Suppose Kevin is operating a cake shop at a perfectly competitive market in South Korea and producing at the shutdown point.
a. Draw graphs to show and explain the price and quantity of Kevin’s cakes, as well as his profit.
b. With the graphs drawn in response to question (a), show and explain the long-run adjustment process for Kevin’s cake shop and the cake industry.

Answer 1

If Kevin is operating a cake shop at a perfectly competitive market in South Korea and producing at the shutdown point, then:
a. P = MC = MR = AVC, the shop is facing losses.
b. In the long-run Kevin’s cake shop will receive normal profits at P = MR = MC = LATC or will exit the industry. In the cake industry there will be less firms and all of them will receive normal profits.