Answer:
To maximize its profit, the firm should;
The answer is option a). increase its output
Explanation:
a). Profits from using the firm's marginal cost
The marginal cost can be described as the change in production cost caused by an increase in the production units by 1.
In our case;
Total marginal cost=marginal cost per unit×number of units produced
where;
marginal cost per unit=$20
number of units produced=1,001 units
replacing;
Total marginal cost=(20×1,001)=$20,020
Total revenue from sales=price per unit×number of units sold
where;
price per unit=$30
number of units sold=1,000=1,000
replacing;
Total revenue from sales=(30×1,000)=$30,000
Total revenue from sales=$30,000
Profits from using the firm's marginal cost=(30,000-20,020)=$9,980
b). Profits from average total cost
Average total cost=average cost per unit×number of units produced
where;
average cost per unit=$25
number of units produced=1,000 units
replacing;
Average total cost=(1,000×25)=$25,000
Profit=total revenue from sales-average total cost
where;
total revenue=30,000
average total cost=25,000
replacing;
profit=(30,000-25,000)=$5,000
The profit at marginal cost is $9,980 is greater than profits at average total cost of $5,000, so it would be better to increase its output in order to maximize profits
