Question

Suppose that at 500 units of output a firm is producing such that marginal revenue is equal to marginal cost. The firm is selling its output at $6 per unit and average total cost at 500 units of output is $5. On the basis of this information we:

A) can say that the firm should close down in the short run
B) can say that the firm is maximizing profit in the short run
C) cannot determine whether the firm should produce or shut down in the short run
D) can assume the firm is not using the most efficient technology

Answer 1

Answer:

B) We can say that the firm is maximizing profit in the short run

Explanation:

A rational producer is at profit maximising equilibrium where : Marginal Revenue = Marginal Cost.

When MR > MC, profit is increasing & it is beneficial for firm to expand output. When MR < MC, it is loss making & it is beneficial for firm to decrease output.

If at 500 units of output : MR = MC, firm is maximising profit in short run.