A profit-maximizing firm in a competitive market is currently producing 100 units of output. It has average revenue so $10, average total cost of $8 and fixed cost of $200.

Question

a. what is the profit?
b. what is the marginal cost?
c. what is its average variable cost?
d. is the efficent scale of the firm more than, less than, or equal to 100 units?

Answer 1

a. 10*100-8*100=200
b. because in a profit maximizing firm, firm will choose to sell product at the intersection of price, marginal revenue, and marginal cost. and also, in competitive market, marginal revenue=average revenue=price. thus marginal cost=marginal revenue=average revenue=10
c. average variable cost=variable cost/quantity supplied
variable cost= total cost- fixed cost=8*100-200=600
average variable cost=600/100=6
d. because the efficient scale is the point that intersection among marginal cost, price, and minimum average total cost. however, we can find that the average total cost is 8, price and marginal cost is 10. thus, the efficient scale of the firm is less than 100 units