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 $500 and its total variable cost is $600. If the price of the product were $3 per unit and the firm follows its optimal strategy, the firm will earn an economic profit equal to

Answer 1

The firm will be having a negative profit of - $700.

Step-by-step explanation:

The equilibrium price of the product is $3/unit.

The equilibrium quantity is 100 units.

The total fixed cost is $500 and total variable cost is $600.

The average variable cost is

=
`(TVC)/(Q)`

=
`(600)/(100)`

= $6

The price is not covering the average variable cost, this implies that the firm is having a loss.

The economic profit will be

= TR -TC

=
`\$ 3\ *\ 100\ -\ (\$ 400\ +\ \$ 600)`

= $300 - $1,000

= -$700