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Question 6. (20 points) The licorice industry is competitive.

 The current market price of a string of licorice is $0.50.  At this price, a firm decides to produce 2 million strings of licorice this month. The total fixed cost per month is $400,000 and the average variable cost of $0.40

 

  1. What is the marginal cost of a string at 2 million strings of production level?

 

 Marginal cost is the ∆TC(total cost)/ ∆Q (quantity)


VC (variable cost)= AVC x Q = $0.40 x 2,000,000 = $800,000

 

Total Cost (TC) = Fixed Cost (FC) + VC = $400,000 + $800,000 = $1,200,000

       

 ATC = TC / Q = $1,200,000 / 2,000,000 = $0.60

 

MC = DTC / DQ = ($1,200,000 - $400,000) / (2,000,000 - 0) = $0.40

 

I have a marginal cost of .$40 which is equal to the average variable cost, I think I made a mistake somewhere and I cant catch where.

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