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

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 curve at an output level of 1,400 units. If the firm produces 1,400 ?units, its average variable costs equal $6.50 per ?unit, and its average fixed costs equal $0.80 per unit.??

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

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

Explanation / Answer

ANSWER:

1) In a perfectively competitively world the price equals the marginal revenue and when marginal revenue equals marginal cost , the firm will be maximizing its profit.

Here in this question the price meets marginal cost at 1400 units ( profit maximizing output level).

2) Average revenue = $7

average total cost = average fixed cost + average variable cost = $0.8 + $6.5 = $7.3

total profit = (average revenue - average total cost) * quantity = ($7 - $7.3) * 1400 = -$0.3 * 1400 = -$420

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