Suppose a firm is a price-taker and the market price is p = 5. The firm produces q=10 units and its costs at that quantity are MC(q=10) = 6 and ATC(q=10) = 4. Which statement is correct?

Need as much details as possible. Microeconomics.

a. The firm’s profits are negative at q = 10.

b. The firm is maximizing profits at q = 10.

c. The optimal quantity to produce is less than 10.

d. At q = 10, ATC is decreasing.

Solutions

Expert Solution

Answer: The correct option is b) The firm is maximizing profits at q=10.

Since firm is a price taker, it will maximize profit where P = MC. Here,

P = MC = 6 at 10 units of output, thus firm is maximizing profit.

Also, at 10 units of output price is more than the average total cost ( 5 > 4) which implies that firm is earning a profit of 1$ on every unit sold.

Rahul Sunny answered 1 year ago

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