Marginal revenue equals marginal cost at an output of 10 units. At this output, marginal revenue equals $25, average variable cost equals $30, and average total cost equals $40. In the short run, a profit-maximizing firm will earn a profit of
A) -$150.
B) -$100.
C) $0.
D) $150.

Question

Quizplus · Accepted Answer

At the profit-maximizing output level where marginal revenue equals marginal cost, the firm will continue to produce as long as the price (or marginal revenue) covers the average variable cost. Here, the price is $25, which is less than the average variable cost of $30. This means the firm is not covering its variable costs and will incur a loss. The loss is calculated as the difference between the average total cost and the price, multiplied by the quantity produced: ($40 - $25) * 10 = $150 loss.

Marginal Revenue Equals Marginal Cost at an Output of 10