Question

Suppose that a perfectly competitive firm faces a market price of ​$7 per​ unit, and at this price the​ upward-sloping portion of the​ firm's marginal cost curve crosses its marginal revenue curve at an output level of 1 comma 400 units. If the firm produces 1 comma 400 ​units, its average variable costs equal ​$6.50 per​ unit, and its average fixed costs equal ​$0.80 per unit.

Required:
a. What is the firm's maximizing (or loss-minimizing output level?
b. What is the amount of it's economic profits (or losses) at this output level?

Answer 1

1. This firm have the profit maximizing output level of 1400 units because a firm in any industry will maximize profit where MR=MC. Here MR is equal to MC at the output level of 1400. So profit maximizing level of output is 1400 units.

2. Economic profit = Total revenue - total cost.

Where, Total revenue = Quantity * price

= 1400 * 7

= $9,800

Total variable cost = AVC * quantity

= 6.50 *1400

= $9,100

Total fixed cost = AFC * quantity

= 0.80 * 1400

= $1,120

Economic profit = Total revenue - Total variable cost - Total fixed cost

Economic profit = $9,800 - $9,100 - $1,120

Economic profit = -$420

. The firm is having economic loss equal to 420.

Conclusion: This firm is facing economic loss in its output.