Question

In: Economics

Scenario 14-2 Assume a certain firm is producing Q = 1,000 units of output. At Q...

Scenario 14-2 Assume a certain firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $20 and its average total cost equals $25. The firm sells its output for $30 per unit. Refer to Scenario 14-2. To maximize its profit, the firm should a. decrease its output but continue to produce. b. shut down. c. continue to produce 1,000 units. d. increase its output.

Solutions

Expert Solution

Answer: d

The firm produces 1,000 units. This is not the profit-maximizing stage, since the marginal cost (MC) is below the price.

As per the profit maximizing condition of a perfectly competitive firm, price should equal to MC. It is not happening here, because MC ($20) is not equal to $30 price. Therefore, the firm should produce more output so that MC could be increased.

Since average total cost (ATC) is higher than MC, there is possibility of increasing output.


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