Question

. A company is producing 1,000 units. At this output level, price is $1.50, and marginal revenue is $1.25. Average total cost is $1.10, and marginal cost is $1.40. What can we conclude from this information?

Answer 1

Here firm is producing extra units because a firm will maximise profit where marginal revenue is marginal cost. Here marginal cost is higher than marginal revenue so firm should decrease the output in order to reach the profit maximising output.

Profit at this level of output = Quantity * ( Price - ATC )

= 1000 ( 1.50 - 1.10 )

= 1000 * 0.40

= 400.

But this profit is not maxium, maximum profit will be earned when quantity is produced where MR = MC.

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