Question

Evaluate the following statement: In the short run, information about a perfectly competitive firm’s fixed costs is needed to determine both the profit-maximizing level of output and the amount of profit earned when producing that level of output. Provide an example of companies that illustrate the discussion. I specifically need the example

Answer 1

In order to analyze the statement, we need to determine the term “fixed costs”.There are two types of costs in the short run: fixed costs and variable costs (Nickolas,2019). Variable costs depend on the level of output, increasing or decreasing depending on volume. On the other hand, fixed costs tend to be a one-time initial investment that does not vary regardless of output level. Therefore, it is hard to predict and plan the strategy of the company without the full amount of expenses needed.

In addition, the determination of the cost amount is just a halfway analysis. Another two terms that need to be determined are marginal revenue and marginal cost. In that statement, marginal revenue can be stated to be an extra income earned from the realization of extra product, whereas marginal cost is additive expense caused by additional production of the good (Hall, 2019). Therefore, the point where marginal revenue is equal to marginal cost is determined as a profit-maximizing level of output in a perfectly competitive market.

Consequently, in order to determine the total profit, the total income needs also to be declared besides the total costs. In addition, total expenses are a sum of variable costs and fixed costs declared before.