Answer to Question #273260 in Microeconomics for Katie

Question

Your company is currently producing at Q = 200 units/ month. FC = $ 500 / month.

At the current output level: MC = $ 10 = ATC

At Q = 150, MC = $ 6 = AVC

The market price Pm = $ 8.

If your goal is profit maximization, should you continue at Q = 200, increase Q above 200, or reduce Q below 200? Would you do better to shut down?

Answer 1

If your goal is profit maximization, then you should produce at P = MC.

As P < MC, so you should reduce Q below 200.

As P > AVC, then you should not shut down.