Question

Use the table below to answer the following 5 questions: Question 20 - Question 24. Output , A Total Cost Average | Total Total Variable Cost Cost Average Variable Cost Total Fixed Cost Average Marginal Total Fixed Cost Revenue Cost Price = Marginal Revenue 200 2,000 200 9.5

Fill the table with the values of Marginal Cost given that the Average Variable Cost is at its lowest point.

and in order to maximise economic profit, how should the firm alter its level of production? (e.g. increase, decrease or remain unchanged). Briefly explain why.

Answer 1

Answer

Total Variable Cost = Total Cost - Total Fixed Cost

$\therefore$ Total Variable Cost = 2,000 - 200

Or, Total Variable Cost = 1,800

Average Variable Cost = Total Variable Cost / Output

$\therefore$ Average Variable Cost = 1,800 / 200

Or, Average Variable Cost = 9

Here, it is said that average variable cost is at its lowest point. When average variable cost is at its lowest point, the marginal cost is equal to the average variable cost. Thus the marginal cost here is 9

Total Revenue = Price * Output

$\therefore$Total Revenue = 9.5 * 200

Or, Total Revenue = 1,900

Now, the table will be as follows;

Output	Total Cost	Average Total Cost	Total Variable Cost	Average Variable Cost	Total Fixed Cost	Average Fixed Cost	Marginal Cost	Total Revenue	Price = Marginal Revenue
200	2,000	10	1,800	9	200	1	9	1,900	9.5

The economic profit is maximized at the level of output, where marginal revenue is equal to the marginal cost of production. From the table above we see that at 200 units of output, the marginal revenue is 9.5, and the marginal cost of production is 9. Thus marginal revenue is greater than the marginal cost. It will induce the firm to produce more.Thus the firm will increase its production. With the increase in production, the gap between marginal revenue and marginal cost will come down. When the marginal revenue will be equal to the marginal cost of production, the firm will achieve its profit-maximization point of output. This is the maximum output level the firm will produce in short-run, because after this level of output, the marginal cost will surpass the marginal revenue, and the firm will experience loss.

Hence, in order to maximize economic profit, the firm will increase its level of production here.

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