Question

Assume that marginal revenue equals rising marginal cost at 100 units of output.

At this output level, a firm's total fixed cost is $400 and its total variable cost is $600. If the price of the product is $3 per unit and the firm produces at its optimal level, the firm will earn an economic profit equal to
a) -$600.
b) -$700.
c) $200.
d) -$1,000.
e) -$400.

Answer 1

b) -$700.

Step-by-step explanation:

The economic profit or loss will be:

economic result = revenue - total cost

Where:

fixed cost + variable cost = total cost

400 + 600 = 1,000

revenue = units x selling price per unit

100 units x $3 = $300

economic result = revenue - total cost = 300 - 1,000 = -700

The company is on the optimal level, marginal revenue = marginal cost at 100 units of output.

But, it is not selling at the correct price. It should sale at a higher price.