Chapter 59, Problem 6MCQ

To determine

Loss minimizing output level

Answer to Problem 6MCQ

(c) Where the MC equals price.

Explanation of Solution

A competitive firm’s production decision depends upon the price and marginal costs of the output. In the event of a firm incurring losses, the average total cost is higher than the price per unit. However, the determination of the level of production is not determined by the average total costs. As long as the firm is producing above the minimum average variable cost, the loss-minimizing level of output and profit-maximizing output is determined by P=MC. The firm will produce at the level where P=MC. Hence

(c) is the correct answer.

If the price falls below the minimum average variable costs, the firm will shut down. At minimum average variable cost, P=AVC the firm will be earning just equal to its variable costs and it’s called shut down point. At an output level of minimum ATC, the profit-maximizing firm will earn zero profits. At this level P=MC=ATC. Hence (a), (b), (d), and (e) are the incorrect answers.

Economics Concept Introduction

Introduction:

A competitive firm aims to maximize its profit. The level of profit-maximizing output is determined by the marginal analysis where the price is just equal to the cost of producing an additional unit of output. It implies the level of profit-maximizing output is determined by the price and marginal costs, and the profit-maximizing or loss-minimizing level of output is where P=MC. When a firm is producing at a loss in the market, it's per unit price is not able to cover the per unit costs and is lower than the per unit costs. In such cases, the firm will try to minimize the loss. It is also where P=MC.