Producers profit-maximizing output level? ahh hellppp plz!!?

Question

The question is ...The marginal revenue curve of a monopoly crosses its marginal cost curve at $30 per unit, and an output of 2 million units. The price that consumers are willing and able to pay for this output is $40 per unity. It it produces this output, the firm's average total cost is $43 per unit, and its average fixed cost is $8 per unit.

* What is this producer's profit maximizing output level?

*What are the firms economic profits(or losses)??

I Have been trying to understand this question for about 2 hours now... im not asking for you guys to do my work i jsut need some help before I pull the rest of my hair out lol.. please help!! it would be much appreciated.

Answer 1

2 million units is the profit maximizing output level.  MR=MC is always the profit maximizing output level,

If it produced this output, the firm's average revenue will be negative $3.00 per unit.

It's funny that average fixed cost was introduced when you already had average total cost.  But, lol, just a funny question.

Econ is easy you just have to think about it.  Your book has all the answers.  Use it effectively.  I am not that smart but got A's in econ.

Answer 2

firms will produce as long as the increase in revenue from selling the next unit is higher than or equal to the extra costs incurred in producing it. (Assuming each unit costs more than the previous one).

The condition above ensures that each unit is causing an increase in (revenue-costs=) profits.

Therefore, as a rule, produce until marginal revenue=marginal cost.

This is given as an output of 2 million, with marginal cost=30.

COnsumers are willing to pat 40, hencetotal revenue=$40*2m=$80m.

Hovwever, the average (total) cost per unit is $43, hence the total costs are $43*2m=$86m.

Costs are higher than revenue, loss of $6m.

You will ask why produce if $6m is lost.

The answer is the in the short run, ,the firm still has to incur fixed costs.

Average fixed cost is $8 per unit. Hence the firm is losing $6 per unit whileproducing. But if it did not produce it would still have to incur $8 per unit. That is with production losses are $6m as above. But if it doesn't produce, it still has to pay for fixed costs of $8*2m=$16m.

It is better off producing in the short run.

Answer 3

* Profit maximizing (or loss minimizing) output will be at 2 million units.

Since price is less than ATC ( 40<43) then firm suffers loses but it should continue production in short-run (because it covers variable costs) and close-down in long-run.

** Economic profit is revenue minus costs (I will not count opportunity costs in this simplest case)

TC=ATC*Q

TR=P*Q

Profit(Loss) = (P-ATC)*Q= (40-43)*2 million = -3*2 million = $ -6 million (Loss)

Sample graphs are here:

http://www.saddleback.edu/faculty/aorris...

http://www.saddleback.edu/faculty/aorris...

http://www.unc.edu/~jwilde/gr00942.jpg

http://members.shaw.ca/elementaleconomic...

http://image.wetpaint.com/image/1/w825Ct...

http://www.romaneconomics.com/Exams/Othe...