At a price of $131 and 7 units of output: a. MR exceeds MC, and the firm should expand its output.

At a price of $131 and 7 units of output: a. MR exceeds MC, and the firm should expand its output.

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September 3, 2023
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At a price of $131 and 7 units of output: a. MR exceeds MC, and the firm should expand its output. b. total revenue is less than total cost. c. AVC exceeds ATC. d. the firm would earn only a normal profit

Answer and ExplanationSolution by a verified expert

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Explanation
a is correct
Marginal cost is defined as the change in the total cost due to an additional cost of a good. Marginal revenue is the additional revenue derived from the sale of an additional commodity. In a perfectly competitive market structure, there are many sellers and buyers in the market, and equilibrium is achieved when the price is equal to the marginal cost of the commodity. Marginal revenue is constant and is equal to the price of the commodity. When marginal cost is lower than marginal revenue of the commodity it means that more units of the commodity should be produced in order to maximize their profit. Profits of the perfectly competitive firm would be maximized if marginal revenue is equal to marginal cost.

b is incorrect
Total revenue is defined as the product of price and quantity and the total cost is the cost inquired for producing the commodity. In a perfectly competitive market structure marginal cost for producing the commodity and marginal revenue earned for selling the commodity is kept into concern, not the total revenue or total cost. However, when 7 units of good are produced the total revenue is greater than total cost as the marginal revenue is more than marginal cost.

c is incorrect
The total cost consists of total fixed cost and total variable cost. Average variable cost is the ratio of total fixed cost by the quantity of output produced. Similarly, the average cost is the ratio of total cost by the total units of goods produced. Therefore, the average variable cost can never be more than the average cost because the average fixed cost is always constant irrespective of the quantity of output produced and average cost includes both average variable cost and average fixed cost.

d is incorrect
In a perfectly competitive market, firms only earn a normal profit. Normal profit means when total revenue is equal to the total cost inquired. When marginal cost is equal to marginal revenue, profits are maximized. However, at 7 units output, marginal revenue is more than marginal cost. Thus, profits are not maximized.

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