Question

A firm in a perfectly competitive market has an average total cost of $40 for the 100th good it sells. Its fixed costs are $100. The average total cost of the 101th good is $41. If the market price is $50 this firm should g

Answer 1

b. Sell only 100 goods because the marginal cost of the 101th exceeds marginal revenue

Step-by-step explanation:

Options "Sell 101 goods because it adds to profit. Sell only 100 goods because the marginal cost of the 101th exceeds marginal revenue. Sell 101 goods because its fixed costs are so low. Sell 101 because price is greater than average total costs."

When it produces 100 units, total cost = average cost * units = $40 * 100 = $4,000.

When it produces 101 units, total cost = average cost * units = $41 * 101 = $4,141

So, the marginal cost of the 101st unit = $4,141 - $4,000 = $141. However, since the price is $50, the marginal revenue is $50.

So, the marginal cost of the 101st unit is higher than the marginal revenue.