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Average Total Cost curve

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1. A firm sells in a competitive market in which price is $10. Its marginal cost is 2 + .5Q. Determine the profit-maximizing level of output.

2. A perfectly competitive firm's lowest average total cost is $48 and the corresponding average variable cost at that output is $24. Marginal cost and average variable cost are equal at $10. Assuming that the firm is presently producing a quantity at which average total cost is at its minimum, what does it pay the firm to do if:
a. The market price is $49?
b. The price is $30?
c. The price is $8?

3. Explain why P = MC in the short-run, profit-maximizing equilibrium of the perfectly competitive firm, whereas in long-run equilibrium P = MC = AC.

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Solution Summary

Average Total Cost curve is assessed.

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1. P = MC gives 2 + 0.5Q = 10, or 0.5Q = 10 -2 = 8, which gives Q = 8*2 = 16

2. ATC(min) = $48 and AVC(min) = $24. MC = ...

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