Scenario 14-2
The information below applies to a competitive firm that sells its output for $45 per unit.
• When the firm produces and sells 120 units of output, its average total cost is $23.5.
• When the firm produces and sells 121 units of output, its average total cost is $23.65.
-Refer to Scenario 14-2. Suppose the firm is currently producing and selling 120 units of output. Should the firm increase its output to 121 units?

Question

Quizplus · Accepted Answer

BTo determine whether the firm should increase its output, we need to compare the marginal revenue (MR) with the marginal cost (MC) of producing one more unit. The firm sells its output for $45 per unit, so the MR of selling one more unit is $45. For 120 units, the total cost is 120 units * $23.5 = $2820. For 121 units, the total cost is 121 units * $23.65 = $2861.65. The MC of producing the 121st unit is the change in total cost, which is $2861.65 - $2820 = $41.65. Since the MR ($45) is greater than the MC ($41.65), the firm should increase its output to 121 units (Choice A). Additionally, since the MR ($45) also exceeds the average total cost at 121 units ($23.65), the firm is still making a profit on the 121st unit, supporting the decision to increase output (Choice B).

Scenario 14-2 The Information Below Applies to a Competitive Firm That Sells