A firm is currently producing at the point where MC = MR. The situation for the firm at this point is P = $5, Q = 100, ATC = $6, AVC = $4.50. What do you recommend this firm do?

Question

Quizplus · Accepted Answer

The firm should continue to produce at the current output rate because at that level, the price ($5) exceeds the average variable cost ($4.50). In other words, the firm is covering its variable costs and contributing to covering its fixed costs. If the firm were to shut down, it would still incur its fixed costs, so it is better off continuing production. Increasing production may not be profitable if the marginal cost exceeds the marginal revenue, and shutting down is not recommended since the price exceeds the average variable cost.

A Firm Is Currently Producing at the Point Where MC