**Graph Explanation:**The graph depicts a typical cost and revenue analysis for a firm:- **MC (Marginal Cost)**: This curve rises steeply as quantity increases.- **AC (Average Cost)**: This curve declines, reaches a minimum, then rises.- **MR (Marginal Revenue)**: This is represented by a horizontal line.- **P (Price)**: Corresponds to the horizontal line, indicating a perfectly competitive market where price equals marginal revenue.The intersection of MR and MC at the quantity of 7 units indicates the firm's profit-maximizing quantity of output.**Discussion Points:**a. **Production Decision at 7 Units**: - If the firm is producing 7 units, it should assess where MR equals MC, which suggests this is the profit-maximizing output level. Increasing or decreasing production will lead to less profit.b. **Economic Profits or Loss**: - By comparing AC and P at 7 units, you can determine economic profitability. If P > AC, the firm makes positive economic profits. If P < AC, the firm incurs an economic loss. Here, P appears to be above AC, suggesting positive economic profits.

A perfectly competitive firm maximizes profit at level of output where P = MR = MC or MR > MC. At…

Answered: a. If the firm is currently producing 7…

a. If the firm is currently producing 7 units, should the fırm increase or decrease production? b. Is this firm making positive economic profits or incurring an economic loss?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Profit Maximization

Economic activity is related to the use of scarce resources of the economy that are used for producing goods and services which are required to satisfy various demands of the people. In other words, it can be said that it is all about satisfying the unlimited demands of individuals with the limited resources available. The production decision is taken by the producers or the firms. In economics, the terms ‘producers’, ‘suppliers’, and ‘firms’ are interchangeable. Now the question arises, what does a firm actually mean?

Question

100%

**Graph Explanation:**

The graph depicts a typical cost and revenue analysis for a firm:

- **MC (Marginal Cost)**: This curve rises steeply as quantity increases.
- **AC (Average Cost)**: This curve declines, reaches a minimum, then rises.
- **MR (Marginal Revenue)**: This is represented by a horizontal line.
- **P (Price)**: Corresponds to the horizontal line, indicating a perfectly competitive market where price equals marginal revenue.

The intersection of MR and MC at the quantity of 7 units indicates the firm's profit-maximizing quantity of output.

**Discussion Points:**

a. **Production Decision at 7 Units**:
- If the firm is producing 7 units, it should assess where MR equals MC, which suggests this is the profit-maximizing output level. Increasing or decreasing production will lead to less profit.

b. **Economic Profits or Loss**:
- By comparing AC and P at 7 units, you can determine economic profitability. If P > AC, the firm makes positive economic profits. If P < AC, the firm incurs an economic loss. Here, P appears to be above AC, suggesting positive economic profits.

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