Hi there. You helped me with a couple of questions regarding Econ. I appreciate the help but my issue is I don't understand how you calculate the minimum average variable cost or the output that maximizes profit. I do understand that the price is more than the AVC so they should keep producing in the short run to cover some of the fixed costs. I appreciate your help. Thank you.
In a perfectly competitive industry, the market price is $25. A firm is currently producing 10,000 units of output, its average total cost is $28, its marginal cost is $20, and its average variable cost is $20. Given these facts, explain whether the following statements are true or false, and why.
a. The firm is currently producing at the minimum average variable cost.
b. The firm should produce more output to maximize profit.
c. Average total cost will be less than $28 at the level of output that maximizes the firm’s
Economics/Math - economyst, Wednesday, November 4, 2009 at 9:11am
take a shot, what do you think.
Hint: true, true, true
OK, lets start with the conventional shapes of the MC and AVC curves. The AVC curve has a U shape to it. At low levels of production, the firm can enjoy some returns to scale. But after a while, the law of diminishing returns kicks in, and costs begin to rise. This latter effect means a rising MC curve. REGARDLESS, if MC is less than AVC, then AVC must be declining, if MC is above the AVC curve, the AVC curve must be rising. So, the MC curve always touches the AVC curve at its minimum point. (Unless you have some wave-shaped curve, which we never do or assume).
Think about it. If the current average cost of producing widgets is 15 and the MC of producing one more widget is $10, what must happen to the average when the extra unit is produced? Further, we could apply this same reasoning for the average total cost curve.
So, you are given MC=$20 and AVC=$20. It must be also true that the AVC is at its minimum point. So, a) is true
b) In the perfectly competitive firm, price is also the marginal revenue (MR). Always always always maximize profits where MC=MR. Since, as given, P=MR=$25 and MC=20, the firm should produce more. So b) is true.
c) Note AVC = (variable costs)/Q and ATC = (fixed + variable costs)/Q (where Q is output)
Go back to a) if the firm increase production from where MC goes from 20 to 25, What must happen to ATC if it started at $28. Since MC < ATC, with each additional unit, ATC must fall. So c) is true
srsrr
To determine whether the statements are true or false, let's analyze the given information:
a. The firm is currently producing at the minimum average variable cost.
False. The average variable cost (AVC) is given as $20, but the firm's average total cost (ATC) is $28. The minimum average variable cost indicates the point at which the AVC is at its lowest, and it typically occurs at a lower level of output than the point where ATC is minimized. So, the firm is not currently producing at the minimum average variable cost.
b. The firm should produce more output to maximize profit.
True. In a perfectly competitive industry, a firm should produce where marginal cost (MC) equals the market price to maximize profit. The given marginal cost is $20, which is less than the market price of $25. Therefore, the firm should produce more output because the additional units will add more revenue than cost, thereby increasing profit.
c. Average total cost will be less than $28 at the level of output that maximizes the firm's profit.
True. The firm's average total cost (ATC) is given as $28. To maximize profit, the firm should produce at the level of output where marginal cost (MC) equals the market price. Since the market price is $25 and the marginal cost is $20, the firm is producing at a level that yields a lower average total cost than $28. So, average total cost will be less than $28 at the level of output that maximizes the firm's profit.
Therefore, the correct answers are:
a. False
b. True
c. True
To calculate the minimum average variable cost, you need to find the output level at which the average variable cost is lowest. In this case, the average variable cost is $20. This means that for every unit of output produced, the firm incurs an average variable cost of $20.
To determine if the firm is currently producing at the minimum average variable cost, compare the average variable cost with the current average total cost. If the average total cost is lower than the average variable cost, it means the firm is producing at a level where the average variable cost is not minimized. Therefore, the statement "The firm is currently producing at the minimum average variable cost" is false.
To determine if the firm should produce more output to maximize profit, you need to consider the relationship between marginal cost and marginal revenue. Marginal revenue represents the change in total revenue from producing one additional unit of output. In perfectly competitive markets, price is equal to both average revenue and marginal revenue. In this case, the market price is $25, and the marginal cost is $20.
To maximize profit, the firm should continue producing as long as the marginal cost is less than or equal to the market price. Since the marginal cost of $20 is less than the market price of $25, the firm should produce more output to maximize profit. Therefore, the statement "The firm should produce more output to maximize profit" is true.
To determine if average total cost will be less than $28 at the level of output that maximizes the firm's profit, you need to consider the relationship between average total cost and marginal cost. If the marginal cost is lower than the average total cost, producing more output will reduce the average total cost and lead to a lower cost of production.
Since the marginal cost of $20 is lower than the average total cost of $28, producing more output will likely lead to a decrease in the average total cost. Therefore, the statement "Average total cost will be less than $28 at the level of output that maximizes the firm's profit" is true.
Overall, the correct answers are:
a. False - The firm is not currently producing at the minimum average variable cost.
b. True - The firm should produce more output to maximize profit.
c. True - Average total cost will be less than $28 at the level of output that maximizes the firm's profit.