What is the firm's profit-maximizing level of output?
0 -- --
1 $16 $10
2 16 9
3 16 13
4 16 17
5 16 21
Refer to the above information. Assuming the firm's minimum average variable cost (AVC) is $10, what is the firm's profit-maximizing level of output?
WHY??
Answer:
at the point where MR cuts MC from below, that is the profit maximising, or loss minimisation point. this is the basic rule.
in the event that there is no output at that exact price, take the last complete output.
in your case, since MC cuts MR at point 3 and 4, take output 3, which is the nearest, lowest price before MC = MR and MC cuts MR from below.
Three units of output maximize profit, since (1) P=MR=16>10=minimum AVC and (2) 3 units of output is the largest level of output at which MR>MC. Note that the third unit increases profit by $3, since MR-MC=16-13=$3 at that quantity. If a 4th unit is produced, however, then that unit reduces profit by $1, since MR=MC=16-17=-$1 at that quantity.
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