Reference no: EM13150118

Loss Minimization Case (Average Variable Cost < Market Price < Average Total Cost)

If the market price in the above example = $170,
let's answer the following 3 questions:

(1) Should the firm produce? The firm should produce as long as the market price >= Average Variable Cost (AVC).

(2) If so, how much?
- Profit Maximizing Rule: A firm maximizes profit by continuing to produce and sell output until Marginal Revenue (MR) = Marginal Cost (MC).
- In pure competition, price = marginal revenue, so in purely competitive industries the rule can be restated as the firm should produce that output where P = MC, because P = MR.

(3) What will be the profit or loss? The profit (or loss) = [Market Price - ATC] * Output
Let's use the following question to understand these 5 scenarios

Output AVC ATC MC MR
40 176.00 201.00 117.33 200
54 162.96 181.48 125.71 200
65 162.46 177.85 160.00 200
75 164.27 177.60 176.00 200
84 167.62 179.52 195.56 200
90 176.00 187.11 293.33 200


Alternatively, you can use hypothetical numbers to explain. Information you need to provide include--state the product you are selling, the price of the product, the quantity of the product you produce, fixed costs, total cost, figure out total revenue, total and average variable costs. Then go ahead and make your decision.