Figure 8.5 Figure 8.5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry.
-Refer to Figure 8.5.The firm's manager suggests that the firm's goal should be to maximise average profit.In that case, what is the output level and what is the average profit that will achieve the manager's goal?
A)Q = 1350 units, average profit = $5
B)Q = 1100 units, average profit = $6
C)Q = 1350 units, average profit = $9
D)Q = 1800 units, average profit = $20

Question

Figure 8.5  Figure 8.5 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry.
-Refer to Figure 8.5.The firm's manager suggests that the firm's goal should be to maximise average profit.In that case, what is the output level and what is the average profit that will achieve the manager's goal?
A)Q = 1350 units, average profit = $5 
B)Q = 1100 units, average profit = $6 
C)Q = 1350 units, average profit = $9 
D)Q = 1800 units, average profit = $20

Quizplus · Accepted Answer

To maximize average profit, the firm should produce where marginal cost equals marginal revenue, which is at an output level of 1100 units. At that output level, the average profit is ($10 - $4) x 1100 / 1100 = $6. Therefore, choice B is the correct answer. Choice A is incorrect because the output level is too high, resulting in lower average profit. Choice C is incorrect because the average profit is too high, which means the firm is not producing enough to fully utilize its resources. Choice D is incorrect because the output level is too high, resulting in lower average profit.

Figure 85 Figure 8