1. Q* includes/excludes units whose cost (MC) is greater than their revenue (P). 2. Why? 3....

1. Q* includes/excludes units whose cost (MC) is greater than their revenue (P).

2. Why?

3. Q* includes/excludes units whose cost (MC) is less than their revenue (P).

4. Why?

5. Does Q* guarantee a maximum profit, minimized loss, to break-even or none/all of the above?

6. Why?

7. If profit is not possible, Q* certainly makes any losses smaller than FC.- true/false?

8. Why?

Solutions

Expert Solution

1. True. The optimum level of quantity produced by the firm generally excludes the units for which cost is greater than their revenue because the cost incurred by the firm will exceed the revenue of the firm and thus firm will have to bear losses and thus excludes production of such units.

2. Q* includes the units for which cost or the marginal cost of production is less than their revenue. This is because by producing such units, the firm can earn profits because cost of the firm is less than price charged by the firm.

3. Q* at the level where MR of the firm is equal to MC of the firm guarantees maximum profit for the firm.

4. True. If the firm is not able to make profits, then Q* will make losses smaller than Fixed Cost because the firm can cover the variable cost of production and some portion of the fixed cost as price is greater than moinimum point of the Average Variable cost of the firm and thus will continue its production.

Rahul Sunny answered 1 year ago

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