Asked Oct 27, 2019

Question 26
Consider the firm whose MC, AC, AVC, AFC functions are shown in the following graph. (The following is a description of the figure: This figure is a two-axis graph; in the horizontal line we measure output q, and in the vertical line dollars $; there are four curves. The first, MC starts at a positive level when q=0; more precisely, MC(0) is greater than 16 and lower than 30; then MC is decreasing for values of q in between 0 and 50; at 50 MC has a minimum; this minimum is MC(50)=10; after q=50, MC is increasing; in particular MC(100)=16, MC(120)=30. The second curve, AVC, starts at the same level of MC(0); it is decreasing when q is between 0 and 100; in this range AVC is above MC; at q=100, AVC crosses MC; more precisely, AVC(100)=MC(100)=16; for q>100, AVC is increasing and below MC. The third curve, AC, has a positive asymptote at zero, that is, it grows to plus infinity when q is very small; AC is decreasing when q is in between 0 and 120; in this range is above MC; AC(100)=34; AC and MC cross at q=120; more precisely, AC(120)=MC(120)=30; for q>=120, AC is increasing, below MC and above AVC.)

If the output price is equal to $34, then the firm maximizes profits by producing?

50 units

0 units

100 units

more than 0 but less than 50 units

more than 120 units

100 120

Image Transcriptionclose

MC AC AVC 34 30 16 10 AF Output 50 100 120

check_circleExpert Solution
Step 1

The Marginal cost, Average cost, Average Variable cost and Average fixed cost curves of the firm are given in the figure.

Step 2

If the firm produces more than 120 units, it will incur higher economic losses and when the firm produces below 50, it will also generate economic loss as the price will be below the minimum AVC. At price of $16, the firm would earn an economic loss of $1,800 as the price is bel...

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