Suppose that each firm in a perfectly competitive market has a short-run total cost of TC = 75 + 500Q - 5Q² + 0.5Q³, where MC = 500 - 10Q + 1.5Q². The output that minimizes the firm's AVC is ____.

Question

Quizplus · Accepted Answer

To minimize the Average Variable Cost (AVC), we first need to find the AVC formula by excluding the fixed cost (75) from the total cost (TC) equation and then dividing by Q. The variable cost (VC) part of TC is 500Q - 5Q^2 + 0.5Q^3. AVC is then VC/Q = 500 - 5Q + 0.5Q^2. To find the minimum AVC, we take the derivative of AVC with respect to Q and set it to zero. The derivative of AVC with respect to Q is -5 + Q = 0, solving for Q gives Q = 5. This output level minimizes the firm's AVC.

Suppose That Each Firm in a Perfectly Competitive Market Has