Assume that marginal revenue equals rising marginal cost at 100 units of output.

Question

 

At this output level, a firm's total fixed cost is $400 and its total variable cost is $600. If the price of the product is $3 per unit and the firm produces at its optimal level, the firm will earn an economic profit equal to

 

a) -$600.

b) -$700.

c) $200.

d) -$1,000.

e) -$400.

Answer 1

This is a profit maximization question. Profit maximizing firms always produce where marginal revenue equals marginal cost so the firm produces a quantity of 100, the firms price is P=3 we can now solve for profit. Profit is defined as Pr=Total Revenue-Total Cost. Total Revenue is equal to Price*Quantity so we have TR=(3)*(100), now we need to calculate total cost TC= Total Fixed Cost+Total Variable Cost so TC=400+600 which gives us the profit equation Pr=300-1000=-700. The firm is suffering economic losses of $700 answer b).