A competitive firm currently produces and sells 500 units of output. Its total revenue is $3,500; the marginal cost of producing the 500th unit of output is $5.75; and the average total cost of producing the 500th unit of output is $4.00. Is the firm maximizing its profit, or should it increase or decrease output in order to increase its profit?

Question

Business

Ellis

11 December, 08:53

A competitive firm currently produces and sells 500 units of output. Its total revenue is $3,500; the marginal cost of producing the 500th unit of output is $5.75; and the average total cost of producing the 500th unit of output is $4.00. Is the firm maximizing its profit, or should it increase or decrease output in order to increase its profit?

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Darrell · Answer 1

Answer: Reduce output

Explanation: Profit = Total Revenue - Total Costs

Therefore, profit maximization occurs therefore, profit maximization occurs at the most significant gap or the biggest difference between the total revenue and the total cost.

TC = AC*Q = $4*500 = $2,000

Theoretically, profit maximization occurs where MR = MC

From the forgoing, producing an extra unit will increase the cost of the company thereby reducing profit.

The company should reduced output to around 499 units or less