In a competitive market, the market-determined price is $25. For a firm currently producing 10,000 units...

In a competitive market, the market-determined price is $25. For a firm currently producing 10,000 units of output, short-run marginal cost is $20, average total cost is $28, and average variable cost is $20. Is this firm making the profit-maximizing decision? Why or why not? If not, what should the firm do? Explain.

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Expert Solution

To maximize the profit in the short run the firm will have to match the price and the marginal cost, here the price is $25 and the marginal cost is $20, the firm should increase the output to the point where the price and MC are equal. i.e. the MC will increase to P that is 425.

If the firm increase the output they will be maximizing the profit at the current price and it will increase the revenue. After increasing the output the firm will still be facing a negative profit as the MC and the price will be less than ATC.

Rahul Sunny answered 1 year ago

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