Asked by Salvatore Belziti on Jun 09, 2024
Verified
A firm sells a product in a purely competitive market. The marginal cost of the product at the current output of 3,200 units is $7.40. The minimum possible average variable cost is $4.90. The market price of the product is $8.20. To maximize profits or minimize losses, the firm should
A) continue producing 3,200 units..
B) continue production, but reduce output..
C) increase production..
D) shut down..
Average Variable Cost
The total variable costs divided by the quantity of output, indicating the variable cost per unit of output.
Marginal Cost
The hike in production costs when an additional unit of a good or service is manufactured.
Market Price
The existing selling or buying price for a service or asset in a particular trading environment.
- Explore the significance of marginal cost and marginal revenue in fine-tuning production outputs.
Verified Answer
MH
Meagan HernandezJun 14, 2024
Final Answer :
C
Explanation :
In a purely competitive market, a firm maximizes profit or minimizes losses by producing at the level where the market price equals the marginal cost, as long as the price is above the average variable cost. Here, the market price ($8.20) is above the marginal cost ($7.40) and also above the minimum average variable cost ($4.90), indicating the firm should increase production to align the marginal cost with the market price.
Learning Objectives
- Explore the significance of marginal cost and marginal revenue in fine-tuning production outputs.
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