Suppose product price is fixed at $24; MR = MC at Q = 200; AFC = $6; AVC = $16. What do you advise this firm to do?
A) Increase output.
B) Decrease output.
C) Shut down operations.
D) Stay at the current output; the firm is earning a profit of $400.
E) Stay at the current output; the firm is losing $200.

Question

Quizplus · Accepted Answer

The firm is currently producing at a level where MR=MC, indicating that it is maximizing its profits. Furthermore, since the price ($24) is greater than the average variable cost ($16), the firm is covering all of its variable costs and earning a contribution towards its fixed costs.

To determine whether the firm is earning a profit or a loss, we need to calculate its total cost and total revenue.

Total Cost = Total Fixed Cost + Total Variable Cost
Total Fixed Cost = Average Fixed Cost x Quantity = $6 x 200 = $1200
Total Variable Cost = Average Variable Cost x Quantity = $16 x 200 = $3200
Total Cost = $1200 + $3200 = $4400

Total Revenue = Price x Quantity = $24 x 200 = $4800

Profit = Total Revenue - Total Cost = $4800 - $4400 = $400

Therefore, the firm is earning a profit of $400 at its current output level and should continue to produce at this level.

Suppose Product Price Is Fixed at $24; MR = MC