Assume a certain firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $20 and its average total cost equals $25. The firm sells its output for $30 per unit. Refer to Scenario 14-2. To maximize its profit, the firm should a. increase its output. b. continue to produce 1,000 units. c. decrease its output but continue to produce. d. shut down.

To maximize its profit, the firm should;

The answer is option a). increase its output

Explanation:

a). Profits from using the firm's marginal cost

The marginal cost can be described as the change in production cost caused by an increase in the production units by 1.

In our case;

Total marginal cost=marginal cost per unit*number of units produced

where;

marginal cost per unit=$20

number of units produced=1,001 units

replacing;

Total marginal cost = (20*1,001) = $20,020

Total revenue from sales=price per unit*number of units sold

where;

price per unit=$30

number of units sold=1,000=1,000

replacing;

Total revenue from sales = (30*1,000) = $30,000

Total revenue from sales=$30,000

Profits from using the firm's marginal cost = (30,000-20,020) = $9,980

b). Profits from average total cost

Average total cost=average cost per unit*number of units produced

where;

average cost per unit=$25

number of units produced=1,000 units

replacing;

Average total cost = (1,000*25) = $25,000

Profit=total revenue from sales-average total cost

where;

total revenue=30,000

average total cost=25,000

replacing;

profit = (30,000-25,000) = $5,000

The profit at marginal cost is $9,980 is greater than profits at average total cost of $5,000, so it would be better to increase its output in order to maximize profits