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.

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.

Rahul Sunny answered 2 years ago

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