Exhibit 7-8 A firm's cost and marginal revenue curves

-In Exhibit 7-8,product price in this market is fixed at $35.This firm is currently operating where MR = MC.What do you advise this firm to do?

Question

Exhibit 7-8 A firm's cost and marginal revenue curves
 
-In Exhibit 7-8,product price in this market is fixed at $35.This firm is currently operating where MR = MC.What do you advise this firm to do?

Quizplus · Accepted Answer

Since the firm is currently operating where MR = MC, it is already at the profit-maximizing level of output. Therefore, it should continue to operate at its current output. If it were to increase or decrease output, it would move to a point where MR no longer equals MC and thus reduce its profits. Shutting down would not be a good idea, as the firm is currently covering its variable costs and making some contribution to its fixed costs, so it would lose even more by shutting down. Decreasing price would also not be a good idea, as it would decrease the firm's revenue and profit.

Exhibit 7-8 a Firm's Cost and Marginal Revenue Curves