Suppose your firm has a U-shaped average variable cost curve and operates in a perfectly competitive market. If you produce where the product price (marginal revenue) equals average variable cost (on the upward sloping portion of the AVC curve), then your output will:
A) exceed the profit-maximizing level of output.
B) be smaller than the profit-maximizing level of output.
C) equal the profit-maximizing level of output.
D) generate zero economic profits.

Question

Quizplus · Accepted Answer

Producing where price equals average variable cost on the upward sloping portion of the AVC curve results in output exceeding the profit-maximizing level. The profit-maximizing output is where marginal cost equals marginal revenue, not where price equals AVC.

Suppose Your Firm Has a U-Shaped Average Variable Cost Curve