Asked by jeremiah coleman on Jul 07, 2024
Verified
Assume a purely competitive firm is selling 200 units of output at $3 each.At this output,its total fixed cost is $100 and its total variable cost is $350.This firm:
A) is maximizing its profit.
B) is making a profit,but not necessarily the maximum profit.
C) is incurring losses.
D) should shut down in the short run.
Total Fixed Cost
The sum of all costs that do not change with the level of output or activity.
Total Variable Cost
Total Variable Cost is the sum of all costs that vary directly with the level of production, such as materials and labor costs.
Purely Competitive Firm
A firm operating in a market where there are many sellers and buyers, products are identical, and there are no barriers to entry, leading to zero long-term economic profits.
- Identify the situations that lead a firm to either proceed with production or stop operations in the short term.
- Assess the impact of economic earnings on a firm's decisions about production.
Verified Answer
JD
Judith DelgadoJul 12, 2024
Final Answer :
B
Explanation :
To determine if the firm is maximizing profit, we need to calculate its total revenue (TR) and total cost (TC).
TR = Price x Quantity = $3 x 200 = $600
TC = Total Fixed Cost + Total Variable Cost = $100 + $350 = $450
Total profit (π) = TR - TC = $600 - $450 = $150
Since the firm is making a positive profit, it is not incurring losses. However, to determine if it is maximizing profit, we need to check if there is an alternative output level that would result in a higher profit. This can be done by calculating the marginal cost (MC) and marginal revenue (MR) at the current output level of 200 units.
MC = Change in Total Cost / Change in Quantity = $350 / 200 = $1.75
MR = Change in Total Revenue / Change in Quantity = $3
If MR > MC, the firm can increase its profit by producing more units. If MC > MR, the firm should produce fewer units.
Since MR = $3 > MC = $1.75, the firm could increase its profit by producing more units. Therefore, the firm is making a profit but not necessarily the maximum profit.
TR = Price x Quantity = $3 x 200 = $600
TC = Total Fixed Cost + Total Variable Cost = $100 + $350 = $450
Total profit (π) = TR - TC = $600 - $450 = $150
Since the firm is making a positive profit, it is not incurring losses. However, to determine if it is maximizing profit, we need to check if there is an alternative output level that would result in a higher profit. This can be done by calculating the marginal cost (MC) and marginal revenue (MR) at the current output level of 200 units.
MC = Change in Total Cost / Change in Quantity = $350 / 200 = $1.75
MR = Change in Total Revenue / Change in Quantity = $3
If MR > MC, the firm can increase its profit by producing more units. If MC > MR, the firm should produce fewer units.
Since MR = $3 > MC = $1.75, the firm could increase its profit by producing more units. Therefore, the firm is making a profit but not necessarily the maximum profit.
Learning Objectives
- Identify the situations that lead a firm to either proceed with production or stop operations in the short term.
- Assess the impact of economic earnings on a firm's decisions about production.