8. Suppose that at 500 units of output a firm is producing such that marginal re

Question

8. Suppose that at 500 units of output a firm is producing such that marginal revenue is equal to marginal cost. The firm is selling its output at $6 per unit and average total cost at 500 units of output is $5. On the basis of this information we:

A) can say that the firm should close down in the short run

B) can say that the firm is maximizing profit in the short run

C) cannot determine whether the firm should produce or shut down in the short run

D) can assume the firm is not using the most efficient technology

Please explain how you got the answer.

Explanation / Answer

Q=500 at MR=MC

P=6 $ per unit

ATC at Q=500 is 5 $

Total revenue=PQ=6(500)=3000 $

Total cost=ATC(Q)=5(500)=2500 $

Total revenue>Total cost

If MR=MC ,profits are maximized because slope of TR=slope of TC.

So correct option is B

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