The figure above shows cost curves for a perfectly competitive firm.If market price is $0.70,a profit-maximizing firm will produce _____ units of output and earn profits of _____.

Question

Quizplus · Accepted Answer

At the profit-maximizing output level, the marginal cost (MC) of producing an additional unit of output is equal to the market price (P). In the given figure, this occurs at a quantity of 300 units. At this output level, the total cost (TC) is $400 (the intersection of MC and ATC curves). Since the market price is $0.70, the firm will earn total revenue of $210 ($0.70 x 300).

Therefore, the firm will make negative profits of $190 ($210 in total revenue - $400 in total cost), meaning it is better off not producing anything and minimizing its losses. Hence, the answer is D (zero units of output and profits of -$400).

The Figure Above Shows Cost Curves for a Perfectly Competitive