Chapter 9: Problem 17

The most efficient output of a firm is located (LO1, 7) a) at the shut-down point b) at the break-even point c) where \(\mathrm{MC}=\mathrm{MR}\) d) when the vertical distance between AVC and ATC is at a maximum

Short Answer

Expert verified

The most efficient output of a firm is located where \(MC = MR\). Therefore, the correct answer is (c).

Step by step solution

Option A Explanation

At the shut-down point, a firm's revenue is just enough to cover its variable costs, and its total revenues are less than its total costs. Therefore, it will decide to temporarily stop production to minimize losses. This point does not represent the most efficient output of a firm since the firm could still decide to produce more if the price were to rise.

Option B Explanation

At the break-even point, a firm's total revenues equal total costs. Any output produced beyond this point would result in profit, while producing less output would lead to losses. However, the break-even point does not represent the most efficient output of a firm since it only ensures that a firm is covering all of its costs but not necessarily maximizing its profit.

Option C Explanation

The point where MC equals MR is the most efficient output of a firm. This occurs when the derivative of profit with respect to output is at its maximum. It means that the firm's profit-maximizing output level is achieved when the additional cost of producing one more unit equals the additional revenue generated by that unit. Thus, this condition best defines the most efficient output of a firm.

Option D Explanation

When the vertical distance between AVC and ATC is at a maximum, it implies that the difference between a firm's fixed costs and variable costs is at its greatest. This point does not necessarily represent the most efficient output because it does not take into account the level of output where a firm is maximizing its profit.

Conclusion

Based on the explanation of each option, the most efficient output of a firm is located where \(MC = MR\). Therefore, the correct answer is (c).

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