The company will incur losses of $5 by producing 5 units and selling them for $25 each. The average cost is higher than the price, indicating loss. The marginal unit produced is also decreasing profits.
a. In this case, the company will incur losses.
The total revenue can be calculated by multiplying the quantity of units (5) by the price per unit ($25), which equals $125.
However, the total cost of producing 5 units is $130.
Therefore, the company will experience losses of $5.
b. By comparing the average cost to the price, we can determine if the company is making a profit or incurring losses.
At a production level of 5 units, the average cost is $26 per unit, while the price is $25 per unit.
Since the price is less than the average cost, the company is incurring losses.
c. The marginal unit refers to the additional unit produced.
In this case, the marginal cost of producing an additional unit is $30, while the price remains $25.
Since the marginal cost exceeds the price, the marginal unit is not adding to profits but is actually decreasing profits.
Therefore, the company should reduce its quantity produced.