mr. smith is hired as a consultant to a firm in a perfectly competitive industry. at the current output level, the price is $60, the average variable cost is $50, average total cost is $75, and the marginal cost is $70. in order to maximize profits in the short-run, mr. smith will recommend that the firm should

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16-12-2022
Business

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mr. smith is hired as a consultant to a firm in a perfectly competitive industry. at the current output level, the price is $60, the average variable cost is $50, average total cost is $75, and the marginal cost is $70. in order to maximize profits in the short-run, mr. smith will recommend that the firm should

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PallaviB PallaviB · Answer 1 · 2022-12-19T16:30:37+01:00

In order to maximize profits in the short-run, Mr. Smith will recommend that the firm should produce the output level where the marginal revenue (MR) is equal to marginal cost (MC). In a perfectly competitive industry, the price is constant and is equal to the MR, which is $60. Since the MC is $70, the firm should reduce its output in order to maximize profits.

The output level where MR=MC is referred to as the profit-maximizing output. At this output level, the firm will be able to produce where the marginal revenue earned from the last unit produced is equal to the marginal cost of producing this unit.

In order to determine the optimal output level, Mr. Smith will need to calculate the total revenue (TR) and total cost (TC) at different output levels. The firm will be able to maximize profits when the TR is at its highest and the TC is at its lowest. The optimal output level can then be determined by finding the output level where the TR is at its highest.

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