When is a firm maximizing profits? When must it close down to be efficient? At what...

When is a firm maximizing profits? When must it close down to be efficient? At what average cost point does a firm under perfect competition tend to produce at over time?

What would you say the price elasticity of demand for a luxury car is: elastic or inelastic? Justify your answer

Expert Solution

Solution:

1. A firm is maximizing profits when the marginal revenue equals the marginal cost. This means that additional revenue earned by selling an additional unit of output equals the additional cost incurred on production of that additional one unit. Any higher quantity will result in lower profit additional cost will be higher than additional revenue, any lower quantity will result in lower profit, giving room for more profit.

2. When the price gets lower than the average variable cost, a firm must shut down or close down.

3. A luxurious car, being a luxury good, has a huge elasticity (demand is elastic) as with a slight increase in price, fewer people will demand the car now. So even small change in price will cause a huge change in quantity demanded, making it's demand elastic.

Rahul Sunny answered 2 years ago

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