Use the following to answer question:
Figure 8.11
-(Figure 8.11) If this firm operates, it earns a profit of _____, but if it shuts down, it earns a profit of _____.

Question

Use the following to answer question:
Figure 8.11 
-(Figure 8.11) If this firm operates, it earns a profit of _____, but if it shuts down, it earns a profit of _____.

Quizplus · Accepted Answer

The profit-maximizing output level is where marginal revenue equals marginal cost, which in this case is at 2 units of output. At this level, the price of the product is $3,000 and the average variable cost is $7,000, resulting in a loss of $4,000 per unit. Since the firm is producing 2 units, its total loss is $8,000. If the firm shuts down, it incurs a loss equal to its fixed costs of $5,000. Therefore, the firm should choose to shut down, resulting in a profit of -$5,000.

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