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Question 7-Firms in Competiive Markets: A competitive firm currently produces and sells 500 units of output. Its total revenue is $6,000; the marginal cost of producing the 500 unit of output is $14.50; and the average total cost of producing the 500th unit of output is s9.50. Is the firm maximizing its profit, or should it increase or decrease output in order to increase its profit?

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Answer #1

A competitive firm maximises it's profit when P= MC

P= total revenue/quantity

= 6000/500= 12

MC= 14.5

Price is not equal to marginal cost, firm is not maximising profit.

It should decrease its output in order to increase profits.

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