a. In a competitive industry, the market-determined price is $12. For a firm currently producing 50...

a. In a competitive industry, the market-determined price is $12. For a firm currently producing 50 units of output, short-run marginal cost is $15, average total cost is $14, and average variable cost is $7. Is this firm making the profit-maximizing decision? Why or why not? If not, what should the firm do?

b. In a different competitive market, the market-determined price is $25. A firm in this market is producing 10,000 units of output, and, at this output level, the firm’s average total cost reaches its minimum value of $25. Is this firm making the profit- maximizing decision? Why or why not? If not, what should the firm do?

c. In yet another competitive industry, the market-determined price is $60. For a firm currently producing 100 units of output, short-run marginal cost is $50, average total cost is $95, and the average variable cost is $10. This firm also incurs total quasi- fixed costs of $7,000 (or $70 per unit). Is this firm making the profit-maximizing decision? Why or why not? If not, what should the firm do? (Hint: You will need to compute total avoidable cost

Expert Solution

Answer : a) Given, market price = $12 ; firm's average total cost (ATC) = $14 and marginal cost (MC) = $15 which are higher than the price level in short run. As average total cost is higher than the price level in competitive market the firm feces loss in short run. Therefore, 50 units production decision is not profit-maximizing for the firm in short run as ATC is higher than the price level.

As average variable cost (AVC) is $7 which is less than the price level, the firm should continue it's production in short run.

Rahul Sunny answered 2 years ago

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