Question

A profit-maximizing firm in a competitive market is currently producing 100 units of output. It has a price of $10, average total cost of $8, and fixed cost of $200. Given this, profit is _______, marginal cost is _______, and average variable cost is_________.

Answer 1

$200; $10; $6

Step-by-step explanation:

(i) Profit is the difference between total revenue and total cost.

Profit = Total revenue - Total cost

= (Average revenue - Average cost) Q

= ($10 - $8) × 100 units

= $200

(ii) Under a perfectly competitive market conditions, the average revenue and marginal revenue are equal and profit maximizing firms under these market conditions producing at a point where marginal revenue is equal to the marginal cost.

Therefore, the marginal cost is equal to $10.

(iii) The average cost is the sum total of average fixed cost and average variable cost.

AC = AFC + AVC

AVC = AC - AFC

= $8 - ($200 ÷ 100 units)

= $8 - $2

= $6

Therefore, average variable cost is equal to $6.