Use the graph below to answer the question Exhibit 15 Marginal Revenue and Cost

Question

Use the graph below to answer the question Exhibit 15 Marginal Revenue and Cost per Unit Curves Price & Cost per unit (dollars) a 19 in 500 1,000 1,500 2,000 Quantity of output (units per week) Q-31) Assume the price of the firm's product in Exhibit 15 is $10 per unit. The maximum profit the firm earns is a. zero. b. $5,000 per week. c. $1,500 per week. d. $10,500 per week. Q-32). Assume the price of the firm's product in Exhibit 15 is $4 per unit. the firm earns is a. zero economic profit. b. economy of scale. c. $1,500 per week. d. Should Shut down it is operation

Explanation / Answer

31. Option a. Zero

Explanation: Maximum profit is earned when Marginal revenue and marginal cost equal. Here, marginal revenue i.e. price = $10. Marginal Cost is $10 when 1500 units are produced. At 1500 units, ATC = 10. So, total revenue = units * price = 1500 * $10 = $15,000. Total cost = units * ATC = 1500 * $10 = $15,000. So, profit = total revenue - total cost = $15,000 - $15,000 = 0

32. d. should shut down its operation.

Answer: A firm should shut down when the average variable cost is higher than its marginal revenue i.e. price. Here, the price is $4 and the minimum average variable cost (AVC) is $5. So, the AVC is higher than marginal revenue at all levels of production. So, the firm should shut down operations.

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