Suppose that a perfectly competitive firm faces a market price of $7 per unit, a

Question

Suppose that a perfectly competitive firm faces a market price of $7 per unit, and at this price the upward-sloping portion of the firm's marginal cost curve crosses its marginal revenue curveat an outpuut level of 1,400 units. If the firsm produces 1,400 units, it's average variable costs equal $6.50 per unit, and its average fixed costs equal $0.80 per unit.

What is the firm's maximizing (or loss-minimizing output level?

What is the amount of it's economic profits (or losses) at this output level?

Explanation / Answer

Equilibrium established where the P = MC,

P = $7

and Output at this level is 1,400

While AC = AVC+AFC

= 6.5+.8

=7.3

Average cost is > than the Price level

Hence, this does not maximize the profit

Total Loss to firm =

= 7*1,400 -7.3*1400

=9,800 - 10,220

=$420 (Loss)

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