Answer to Question #127904 in Microeconomics for Brenda Formin

Question

In the short run, a monopolistically competitive firm calculates that marginal cost is $6.00, average total costs are $4.00, and marginal revenue is $3.00. The firm is charging a price of $6.00 and producing 200 units of output. How much profit is the firm making? What output recommendation would you make as the company economist? (2 marks)

Answer 1

Output =200 units

To get the profit per unit;

=Charging price - Average Total costs.

=$6-$4= $2 (per unit)

Getting the total profit ;$2 ×200 =$400.

Therefore profit =$400

From the marginal cost($6) and marginal revenue ($3), the marginal cost is more than the marginal revenue showing that the firm is not maximising profits. The firm should reduce its production to an output level where marginal cost is equal to marginal revenue.