Economic profit

Question

Assume that marginal revenue equals rising marginal cost at 100 units of output. At this output level, a firm's average total cost is $11 and its total variable cost is $600. If the price of the product is $3 per unit and the firm follows its optimal strategy, the firm will earn an economic profit equal to

Group of answer choices

-$600.

-$500.

$300.

-$1,100.

-$400.

Answer 1

The firm's average variable cost is $6 (TVC/Q = $600/100). The firm is selling the product for $3/unit. Since the price is below the average variable cost, the firm will shut down. This means they will produce a quantity of 0 and only pay their fixed costs.

The firm's total cost is $1100, the total variable cost is $600, thus the total fixed cost is $500.

The answer is a loss of $500.