11. Suppose that at 100 units of output a firm is producing such that marginal r

Question

11. Suppose that at 100 units of output a firm is producing such that marginal revenue is equal to marginal cost. The firm is selling its output at a price of $4 per unit and is incurring average total costs of $6 per unit and average variable costs of $1 per unit. On the basis of this information we can conclude that in the short run a purely competitive firm A) is operating at maximum profit by producing the 100 units of output B) is operating at a loss that could be reduced by shutting down C) is operating at a profit that could be increased by producing more output D) is operating at a loss that is less than the loss incurred by shutting down

Explanation / Answer

Answer
Option D
The profit=(P-ATC)*Q
=(6-4)*100=-$200
at shut down the loss equal to fixed cost
=(ATC-AVC)*Q=(6-1)*100=$500
the firm is minimizing losses because it is producing at MR=MC and the P>AVC

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