A firm with market power is producing a level of output at which price is $8,marginal revenue is $5,average variable cost is $6,and marginal cost is $10.In order to maximize profit,the firm should

Question

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The firm is currently producing at a level where marginal cost is greater than marginal revenue ($5<$10). This means the firm is not maximizing profit. In order to increase profit, the firm should reduce output until marginal revenue equals marginal cost. However, since the price ($8) is already greater than average variable cost ($6), the firm is covering its variable costs and some fixed costs. Hence, reducing output to where MR=MC would not cover all the fixed costs and will cause a greater loss. Therefore, the firm should increase price in order to increase the marginal revenue and maximize profit.

A Firm with Market Power Is Producing a Level of Output