a firm produces 20 units of output at a market price of #5, a marginal cost of $5, and an average cost of $3. what is the firms economic profit and is the firm maiximizing its economic profit.
Is the formula market price-average cost x quantity 20?
Yes, so the economic profit is $40
To calculate the firm's economic profit, you need to subtract the total cost from the total revenue.
Total Revenue = Market Price x Quantity
Total Revenue = $5 x 20 units
Total Revenue = $100
Total Cost = Average Cost x Quantity
Total Cost = $3 x 20 units
Total Cost = $60
Economic Profit = Total Revenue - Total Cost
Economic Profit = $100 - $60
Economic Profit = $40
The firm's economic profit is $40.
Now, to determine if the firm is maximizing its economic profit, you need to compare the marginal cost and the market price. If the marginal cost is less than the market price, the firm should produce more units to increase its profits. However, if the marginal cost is greater than the market price, the firm should produce fewer units.
In this case, the marginal cost is $5, which is less than the market price of $5. Therefore, the firm is not maximizing its economic profit because it could increase its profits by producing more units.