Thursday, July 06, 2006

Perfectly Competitive Mug Company

The first person to correctly answer the following question will earn 2 bonus points toward the upcoming Exam 3. (Yes, really, no kidding!)
Your perfectly competitive coffee mug company is currently producing at an output level of 600 units per month. Fixed costs are $500 per month. At the current output level, you know that marginal cost is $8 and equal to average total cost. At an output level of q = 450, you have determined that marginal cost would be $5 and equal to average variable cost. The market price for your coffee mugs is $7. If your goal is profit maximization, should you continue at q = 600, increase q above 600, or reduce q below 600? Would you do better to shut down? Explain.

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