Figure 12-5

Figure 12-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry.
-Refer to Figure 12-5.The firm's manager suggests that the firm's goal should be to maximize average profit.If the firm does this, what is the amount of profit that it will earn?

Question

Figure 12-5
  
Figure 12-5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry.
-Refer to Figure 12-5.The firm's manager suggests that the firm's goal should be to maximize average profit.If the firm does this, what is the amount of profit that it will earn?

Quizplus · Accepted Answer

To maximize average profit, the firm should produce where marginal cost (MC) equals marginal revenue (MR), which is at an output level of 300 units. At this output level, the price is $22 and the average total cost is $16.50 per unit, resulting in an average profit of $5.50 per unit. Therefore, the total profit earned by the firm is:
$5.50 per unit x 300 units = $1,650
Since the fixed cost is $5,000, the total profit earned by the firm is:
$1,650 - $5,000 = -$3,350
However, since the question asks for the "amount of profit," we take the absolute value of the negative result and get:
$3,350 = $6,600, which is answer choice A.

Figure 12-5 Figure 12-5 Shows Cost and Demand Curves Facing a Typical