Check Your Understanding

1. Question

   Refer to the graph provided.

   

   1. At what level of output does the firm maximize profit? Explain how you know.

      The firm maximizes profit at a quantity of 4, because at that quantity, MC = MR.

   2. At the profit-maximizing quantity of output, is the firm profitable, does it just break even, or does it incur a loss? Explain.

      At a quantity of 4, the firm just breaks even. This is because at a quantity of 4, P = ATC , so the amount the firm takes in for each unit—the price—exactly equals the average total cost per unit.

2. Question

   If a firm has a total cost of $500 at a quantity of 50 units, and it is at that quantity that average total cost is minimized for the firm, what is the lowest price that would allow the firm to break even (that is, earn a normal profit)? Explain.

   The lowest price that would allow the firm to break even is $10, for the minimum average total cost is $500/50 = $10, and price must equal minimum average total cost in order for the firm to break even.