Question

Your coffee mug company is currently producing at an output level of 200 units

per month. At the current output level, you know that the marginal cost if $10 and
equal to the ATC. At an output level of 150, you have determined that marginal
cost would be $6 and equal to the AVC. The market price for your coffee mug is
$8. If your goal is profit maximization, should you continue at q=200, increase q
above 200, or reduce q below 200? Would you do better to shut down?

Answer 1

To maximize profit, the coffee mug company should reduce the quantity below 200 or shut down.

Step-by-step explanation:

To determine the profit-maximizing quantity of output, we need to compare the market price to the average variable cost (AVC) and the average total cost (ATC). At an output level of 200, the marginal cost is $10 and equal to ATC. Since the market price of $8 is less than the ATC, the company should reduce the quantity below 200 to minimize losses. In this case, it would be better to shut down because the company would only incur fixed costs.