The figure below displays the short-run marginal cost and short-run average cost curves for a firm

Economics Dec 12, 2020

The figure below displays the short-run marginal cost and short-run average cost curves for a firm. When q = 1 and q = 4, the short-run marginal cost is $4. When q = 4, the short-run average cost is $7. Assume the firm has a fixed cost of $8 and they can sell each unit of output at a price of $4 p=4). What is the profit-maximizing level of output for the firm in the short-run? Profit-maximizing 9 = MC AC 7 1 4 9 (Note: if image does not appear above, click here)

Expert Solution

Profit maximising level of output = 4 units.

This is because, for 4 units selling at $7 for each Quantity, the marginal cost is $4 per unit.

Hence the profit is (7-4)*4 = $12.

Since the profit is greater than fixed cost ($8) , it is the profit maximising quantity.

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