You're called in as a consultant: Price is $24. At a production level of 200 units, MC = MR, AFC = $6, and AVC = $16. What do you advise this firm to do?
A) Increase output.
B) Decrease output.
C) Shut down operations.
D) Stay at 200 units; the firm is earning $400 profit.
E) Stay at 200 units; the firm is minimizing losses of $200.

Question

Quizplus · Accepted Answer

At a production level of 200 units, where MC = MR, the firm is operating efficiently. The total cost (TC) is the sum of AFC and AVC multiplied by the quantity (Q), so TC = ($6 + $16) * 200 = $4400. The total revenue (TR) is price (P) times quantity (Q), so TR = $24 * 200 = $4800. The profit is TR - TC, which equals $4800 - $4400 = $400. Therefore, the firm is earning a $400 profit, indicating they should stay at 200 units.

You're Called in as a Consultant: Price Is $24