Question

Assume that a profit-maximizing firm is perfectly competitive in both the output and the factor markets and is at its long-run equilibrium. The firm's output is 100 units, its total revenue is $600.00, and the fixed cost of production is $50.00. Based on this information, which of the following is true for the firm?

a. Its marginal cost is $5.50, and its average total cost is $5.50.
b. Its marginal cost is $5.50, and its average variable cost is $5.50.
c. Its marginal cost is $6.00, and its average total cost is $5.50.
d. Its marginal cost is $6.00, and its average fixed cost is $5.50.
e. Its marginal cost is $6.00, and its average variable cost is $5.50.

Answer 1

e. Its marginal cost is $6.00, and its average variable cost is $5.50

Step-by-step explanation:

To calculate the variable costs;

We use this method

Variable costs = change in total revenue - fixed costs

And the average variable cost as = variable cost/output

We are given the values as ;

Total revenue = $600

Fixed cost = $50

Output = 100 units

Calculations

Now marginal revenue will be;

Marginal revenue = change in total revenue/change in output

Marginal revenue = 600/100

Marginal revenue = $6.00

Marginal revenue = marginal costs

Therefore, Marginal cost = $6.00

Now variable cost will be

Variable cost = 600 - 50

Variable cost = $550

Average variable cost = $550/100

= $5.50

Answer 2

E. Its marginal cost is $6.00, and its average variable cost is $5.50.

Step-by-step explanation:

Given that

Output = 100 unit

Total revenue = $600

Fixed cost = $50

Marginal revenue = change in total revenue/change in output

= 600/100

= $6.00

But in a perfectly competitive firm, the profit maximizing choice occurs where Marginal revenue = marginal cost.

Hence, Marginal cost = $6.00

Since fixed cost = 50,

Variable cost = 600 - 50

= 550

Average variable cost = variable cost/output

= 550/100

= $5.50