#5

Consider the economic logic behind Part2 of the 3-Part Output Rule of a price taking rm. Produce where P=MC. You can wrap your head around this logic by considering output levels where P 7E MC. Suppose the rm is producing an output level Q1 and the market price is below min ATC. Can this be the prot maximizing level of output? Answer this question by asking what would happen if the rm produced one more unit of output (Q1+1). Increasing output by one more unit would increase revenue from sales of the product by P (the prevailing market price) and increase total cost by MC ( by denition the cost of producing one more unit of output). If P>MC, the extra revenue from selling one more unit would exceed the cost of producing that extra unit. The rm would make a prot on that one extra unit considered in isolation. If the rm were already making a prot, it's total prot would increase. If the rm were losing money, it's total prot would be reduced. 50 if P>MC at the current level of output, the rm would always do better by producing more. This logic can be reversed if at the current output level PP, the rm would save more in costs than they forego in revenue. Decreasing output when P