Econ Question

2.Suppose the fixed cost is decreased to $300 but the market price of the product is $40

a.What is the profit-maximizing level of output of this factory now?

b.Advise Mr. Chan whether he will continue to produce at this level of output or

close the factory. Your answer should be supported with calculations.

1 Answer

  • 1 decade ago
    Favorite Answer

    a. By setting MR=MC, we can find the profit maximization output. Now, MR=$60*10=$600, hence, profit maximization output now reduced to 30units/day.

    b. still operate the factory even though unit price dropped to $60 per unit which is lower than average cost per unit of 63.33, as long as the price is higher than the average vaaiable cost of $50 per unit, Mr. Chan can minimize the loss as he is covering the fixed cost.

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