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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 = 5, the short-run marginal cost is $3. When q=5, the short-run average cost is $5. Assume the firm has a fixed cost of $5 and they can sell each unit of output at a price of $3 (p = 3). What is the profit- maximizing level of output for the firm in the short-run? Profit-maximizing 9 = MC AC 5 3 2 5
Expert Solution
Answer:
5 unit is the profit maximizing quantity.
Explaination:
Profit maximizing level is where the marginal cost equals the marginal revenue,
however in this case marginal revenue is $3 because the price per unit is $3 so, additional revenue for 1 unit sold is $3.
Also there are 2 points where MC = MR
We will consider the quantity as profit maximizing quantity where the additional quantity has higher marginal cost relative to the marginal revenue.
So, it is 5 unit.
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