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3 January, 22:22

Assume a certain firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $20 and its average total cost equals $25. The firm sells its output for $30 per unit. Refer to Scenario 14-2. To maximize its profit, the firm should a. increase its output. b. continue to produce 1,000 units. c. decrease its output but continue to produce. d. shut down.

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  1. 4 January, 02:06
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    To maximize its profit, the firm should;

    The answer is option a). increase its output

    Explanation:

    a). Profits from using the firm's marginal cost

    The marginal cost can be described as the change in production cost caused by an increase in the production units by 1.

    In our case;

    Total marginal cost=marginal cost per unit*number of units produced

    where;

    marginal cost per unit=$20

    number of units produced=1,001 units

    replacing;

    Total marginal cost = (20*1,001) = $20,020

    Total revenue from sales=price per unit*number of units sold

    where;

    price per unit=$30

    number of units sold=1,000=1,000

    replacing;

    Total revenue from sales = (30*1,000) = $30,000

    Total revenue from sales=$30,000

    Profits from using the firm's marginal cost = (30,000-20,020) = $9,980

    b). Profits from average total cost

    Average total cost=average cost per unit*number of units produced

    where;

    average cost per unit=$25

    number of units produced=1,000 units

    replacing;

    Average total cost = (1,000*25) = $25,000

    Profit=total revenue from sales-average total cost

    where;

    total revenue=30,000

    average total cost=25,000

    replacing;

    profit = (30,000-25,000) = $5,000

    The profit at marginal cost is $9,980 is greater than profits at average total cost of $5,000, so it would be better to increase its output in order to maximize profits
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