Question

A perfectly competitive firm is currently producing 10 units of output. Its current total

cost is 85 dollars and its cost curves have the usual shapes. If the firm increased output to 12

units, total cost would rise to 87 dollars. The firm’s fixed cost is 15 dollars. Is Q = 10 the short-run

profit-maximizing level of output for this firm? Why or why not? (Explain and show work)

Answer 1

As, Total Cost for 10 units = $85

Total cost for 12 units = $87

As, Fixed cost = $15

So, Variable cost of 10 units = $85 - $15 = $70

Variable cost of 12 units = $87 - $15 = $72

So, Average variable cost when 10 units is produced = $70/10 = $7

and Average variable cost when 12 units is produced = $72/12 = $6

As, Variable cost falls to $6 from $7 when units produced rises to 12 from 10. So we know short run equilibrium is at the point of minimum average variable cost(AVC).

As, AVC is not minimum at Q = 10 so it's not short run profit maximizing level of output.