Question

Assume a purely competitive firm is selling 200 units of output at $3 each. At this output, its total fixed cost is $100 and its total variable cost is $350. This firm Multiple Choice is maximizing its profit. is making a profit, but not necessarily the maximum profit. should shut down in the short run. is incurring losses.

Answer 1

The correct option is: maximizing its profit, but not necessarily the maximum profit.

What is Profit Maximization in a Perfectly Competitive Market ?

The perfectly competitive firm can choose to sell any quantity of output at exactly the same price. This implies that the firm faces a perfectly elastic demand curve for its product: buyers are willing to buy any number of units of output from the firm at the market price.

When the perfectly competitive firm chooses what quantity to produce, then this quantity—along with the prices prevailing in the market for output and inputs—will determine the firm’s total revenue, total costs, and ultimately, level of profits.

A perfectly competitive firm has only one major decision to make—namely, what quantity to produce. To understand why this is so, consider the basic definition of profit:

Profit=Total revenue−Total cost

(Price) (Quantity produced)−(Average cost) (Quantity produced)

According the question scenario,

Given:

Firm is selling  = 200 units

output = $3 each

fixed cost = $100

variable cost = $350

solution:

Total average cost = variable cost + fixed cost .........(1)

Total average cost  = 350 + 100

Total average cost  = $450

Cost per unit = average cost ÷ no of unit ...................(2)

Cost per unit = 450  ÷  200

Cost per unit = $2.25

So here firm is incurring per units is $2.25 but here earning per unit is $3.

So that here firm is earning economic profit as here market price is greater than earning maximum profit.

Therefore, we can conclude that the correct option is : maximizing its profit, but not necessarily the maximum profit.

Learn more about Profit Maximization on:

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