Question

Heath's company is currently producing thirty units of output. The price of the good is $8 per unit, while total fixed costs are $50 and the average variable cost is $5 at thirty units. This company:_______. a. is experiencing a loss of $40.
b. should shut down its operation.
c. is experiencing an economic profit of $40.
d. should expand its operation.

Answer 1

Answer:

C) is experiencing an economic profit of $40.

Explanation:

Heath's total revenue = 30 units x $8 per unit = $240

average variable cost = $5 per unit, total variable costs = 30 x $5 = $150

total fixed costs = $50

currently Heath is making an economic profit = $240 - $150 - $50 = $40

since the question doesn't tell us anything about Heath's marginal costs, we cannot know if it should expand its production or not. Profits are maximized when marginal costs = marginal revenue ($8).