Question

A perfectly competitive firm that makes car batteries has a fixed cost of $10,000 per month. The market price at which it can sell its output is $100 per battery. The firm’s minimum AVC is $105 per battery. The firm is currently producing 500 batteries a month (the output level at which MR = MC). This firm is making a _____________ and should _______________ production. loss; shut down profit; increase loss; increase profit; shut down

Answer 1

Loss, shutdown

This firm is making a loss and should shutdown

Step-by-step explanation:

For a firm to be make a profit the maximization rule need to be considered, This maximization rule simply states that if a firm opts for maximizing its profits, it definitely has to choose such a level of output where Marginal Cost (MC) is equal to Marginal Revenue (MR). And Marginal Cost should be rising, we can also say, MR=MC.

In this case where 500 batteries a month is the output level at which MR = MC.

Where marginal revenue suppose to be 500 x 105 = 52,500 but instead it is equal to marginal cost which is 10,000.

This simply implies that this firm is making a loss and should shutdown