Suppose that a perfectly competitive firm faces a market price (P) $5 per unit,

Question

Suppose that a perfectly competitive firm faces a market price (P) $5 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 (Q) level of 1,500 units. If the firm produces 1,500 units, its average variable costs (AVC) equal $5.50 per unit, and its average fixed costs (AFC) equal 50 cents per unit. What is the firm’s profit-maximizing (or loss minimizing) output (Q) level? What is the amount of its economic profits (or losses) at this output level? What would be the firm's decision at this price/output level?

Explanation / Answer

The firm's profit maximizing (loss minimizing) output level is where price equals to marginal cost at an output(Q) level of 1,500 units. The firms profit would be:(1500*5) - (1500*5.5) - (1500*.5) = -1500 At this price/output level the firm should shutdown because its marginal revenue is less than its average variable costs.

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