Question

The following questions are based on the table below, which gives cost information for a perfectly competitive firm.

A table with four columns is shown. The first column is quantity, the second column is average fixed costs, the third column is average variable costs, and the fourth column is marginal costs. Row 1 reads 0 in the first column, and all of the other entries are blank. Row 2 reads 1, 100 dollars, 55 dollars, 55 dollars. Row 3 reads 2, 50, 45, 35. Row 4 reads 3, 33.33, 50, 60. Row 5 reads 4, 25, 55, 70. Row 6 reads 5, 20, 60, 80. Row 7 reads 6, 16.67, 65, 90.

51

Mark for Review

If the product price is $85, how many units of output must the firm produce in order to maximize profits?


0


a

3


b

4


c

5


d

6

Answer 1

Produce 5 units.

Reason: p = 85 > AVC at all outputs (so the firm operates). The profit-maximizing rule is choose the largest q with MC ≤ p. MC(5)=80 ≤ 85 but MC(6)=90 > 85, so q = 5.