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The figure below displays the short-run marginal cost and short-run average cost curves for a firm
The figure below displays the short-run marginal cost and short-run average cost curves for a firm. When q = 2 and q = 6, the short-run marginal cost is $4. When q = 6, the short-run average cost is $6. Assume the firm has a fixed cost of $6 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 6 4 2 6 a
Expert Solution
Explanation :
Firm maximises it's profit where MR equals MC and in perfect competition price is equals to MR. So if firm will produce it will produce 6 units. But firm will not produce when price is less than average variable cost.
AVC =VC /Q
=30/6
=5
VC =TC-FC
=36-6
=30
TC =ATC *quantity
=6*6
=36
Because price is less than AVC firm will shutdown to minimise losses.
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