In a perfectly competitive industry the market price is$12. A firm is currently producing 50 units of output; average total cost is $10, marginal cost is $15, and average variable cost is $7. Is the firm making the profit-maximizing decision? Why or why not? If not, what should the firm do? Should the firm shut down? Explain.

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Evangeline Madden

Business

18 April, 01:28

In a perfectly competitive industry the market price is$12. A firm is currently producing 50 units of output; average total cost is $10, marginal cost is $15, and average variable cost is $7. Is the firm making the profit-maximizing decision? Why or why not? If not, what should the firm do? Should the firm shut down? Explain.

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Dalton Holland · Answer 1

In a perfectly competitive industry the market price is also the marginal revenue of a firm and in order to maximize profit a firm has to produce a output at which marginal revenue is equal to marginal cost. In this case the firm's marginal revenue is fixed at 12 so they need to bring their marginal cost down to 12 in order to maximize profits. What they should do is decrease their output to a quantity so that their marginal cost is also 12, when they do this their marginal cost and marginal revenue will be equal and they will be maximizing profits.