Consider the following diagram where a perfectly competitive firm faces a price of $40. Figure 8.1
-Refer to Figure 8.1. At the profit-maximizing level of output, AVC is
A) $22.
B) $26.
C) $30.
D) $32.
E) $40.

Question

Consider the following diagram where a perfectly competitive firm faces a price of $40.  Figure 8.1
-Refer to Figure 8.1. At the profit-maximizing level of output, AVC is
A) $22. 
B) $26. 
C) $30. 
D) $32. 
E) $40.

Quizplus · Accepted Answer

The profit-maximizing level of output is where MR = MC. In the diagram, MR intersects MC at Q1 which corresponds to a quantity of 6 units. At this level of output, the AVC is $26 (as shown by the intersection of AVC and MC). Any level of output below Q1 would result in negative profits, while any level of output above Q1 would result in diminishing returns and lower profits.

Consider the Following Diagram Where a Perfectly Competitive Firm Faces