Chapter 23, Problem 7P

To determine

Suppose that a firm in a perfectly competitive industry finds that at its current output rate, marginal revenue exceeds the minimum average cost of producing any feasible rate of output. Furthermore, the firm is producing an output rate at which marginal cost is less than the average total cost at that rate of output. Is the firm maximizing its economic profits? Why or why not?

Concept Introduction:

Marginal revenue: Marginal revenue is the additional revenue earned by selling one more unit of the output. The marginal revenue is calculated by dividing the change in total revenue by the change in quantity produced.

Economic profit: The economic profit of a firm is calculated by deducting total revenue from total cost. The total costs consists of both implicit and explicit costs. Explicit cost is the ordinary costs of the firm like rent, salaries to the employees etc. Implicit cost is also known as imputed cost describes as the opportunity cost of anything. In a perfect competitive market, if the price is greater than the average total cost; the firm will get a positive economic profit. If the price is below the average total cost curve, the firm will incur a loss. If the price was equal to the average total cost curve, it is called the breakeven point.