One would invest in the competitive firm considering the future benefits though it is making zero economic profits.
Present profitability is not considered by the investors while taking investment decisions. Future anticipations play an important role while determining the level of investment.
Opportunity cost plays an important role since it is evaluated by the investors while investing in a competitive firm. Opportunity cost capital would be less in the present than the value of it in the future.
If the demand is relatively inelastic, then a monopolist can charge higher price. For example, there are two groups X and Y. group X has the elastic demand and the group Y has inelastic demand.
The demand curve of the group which has inelastic demand would be relatively steeper, so the price would be determined at higher level.
On the other hand, the demand curve of the group which has elastic demand would be relatively flatter, so the price would be determined at lower level. Higher price of the product yields higher revenue for the monopolist.
Thus, under price discrimination, the price charged to the customers having inelastic demand would relatively higher than the customers having elastic demand.
The profit of a firm can be calculated by considering total cost and total revenue. The following is a table in which marginal revenue and marginal cost is calculated.
The above table indicates that the marginal revenue equals marginal cost at the level of 150,000 gallons. A firm can maximize its profit by producing at the level where marginal cost equals marginal revenue. Thus, Company Town Water produces 150,000 gallons and charges $0.22 per gallon.
A firm will earn profit by producing 150,000 gallons because at this level total revenue greater than that the total cost. Total revenue is $33,000 and total cost is $22,000. Thus, Company Town Water earns profit of $11,000