7. Problems and Applications Q7 A profit-maximizing firm in a competitive market

Question

7. Problems and Applications Q7

A profit-maximizing firm in a competitive market is currently producing 90 units of output. It has average revenue of $6, average total cost of $6, and fixed cost of $270.

7. Problems and Applications Q7 A profit-maximizing firm in a competitive market is currently producing 90 units of output. It has average revenue of $6, average total cost of $6, and fixed cost of $270. Complete the following table by indicating the firm's profit, marginal cost, and average variable cost. Marginal Cost (Dollars) Profit Average Variable Cost (Dollars) (Dollars) The efficient scale of the firm must be 90 units.

Explanation / Answer

Total cost, TC = Average total cost x Quantity = 6 x 90 = $ 540

Total revenue, TR = Average revenue x Quantity = 6 x 90 = $ 540

Total cost, TC = Total fixed cost + Total variable cost

540 = 270 + Total variable cost

TVC = $ 270

Profit = TR - TC = 540 - 540 = $ 0

Average variable cost = TVC/Q = 270/90 = $ 3

Marginal cost = Average revenue = $ 6

Exactly because P = AR = MR at 90 units of output.

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