Question

A profit maximizing firm in a competitive market is currently producing 100 units of output. It has average revenue of $10, average total costs of $8, and a fixed costs of $200.

1. What is its profit, marginal cost, and average variable cost?
2. Is the efficient scale of the firm more than, less than, or exactly 100 units?

Answer 1

1. What is its profit, marginal cost, and average variable cost?

1. Profit

Profit = (P – ATC) × Q.

           = ($10 – $8) × 100 = $200

2. Marginal cost

For firms in perfect competition, MR = AR. Since profit maximization also implies that MR = MC, thus MC must be $10.

3. Average variable cost

First of all we need to find AFC.

AFC = $200/100 = $2.

AVC = ATC - AFC

AVC = $8 - $2 = $6

2. Is the efficient scale of the firm more than, less than, or exactly 100 units?

Since ATC < MC, ATC must be rising. Therefore, the efficient scale must occur at an output level less than 100.