Question

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)

Answer 1

Question 1

The given scenario depicts the situation of firm in the long-run.

In the long-run, a perfectly competitive firm maximizes profit when it produce that level of output corresponding to which price equals monimum average total cost.

At present, the firm is producing 10,000 units of output.

At this level of output, firm's average total cost is at its minimum.

This value of $25.

The market price is $25.

So, it can be stated that at the level of output produced, price equals minimum average total cost.

Thus, firm is maximizing its profit and is making the profit-maximizing decision.