Figure 16-2. The figure is drawn for a monopolistically competitive firm.

-Refer to Figure 16-2. If the average variable cost is $26 at the profit-maximizing quantity, and if the firm's profit is $40 at that quantity, then its fixed costs amount to
A)$12.
B)$152.
C)$200.
D)$240.

Question

Figure 16-2. The figure is drawn for a monopolistically competitive firm.

-Refer to Figure 16-2. If the average variable cost is $26 at the profit-maximizing quantity, and if the firm's profit is $40 at that quantity, then its fixed costs amount to
A)$12. 
B)$152. 
C)$200. 
D)$240.

Quizplus · Accepted Answer

Profit = total revenue - total cost
At the profit-maximizing quantity, the firm's marginal cost equals its marginal revenue. This occurs at a quantity of 12, where the marginal cost and marginal revenue curves intersect.

At this quantity, the average variable cost is $26. This means that the variable costs total:
$26 x 12 = $312

Profit is given as $40, so total revenue must be:
$312 + $40 = $352

Total cost is:
$352 - Profit = $352 - $40 = $312

Fixed costs are calculated by subtracting variable costs from total costs:
Fixed costs = $312 - ($26 x 12) = $312 - $312 = $0

However, the question specifically asks for the fixed costs amount, so we need to assume that fixed costs are positive. The only answer choice that reflects a positive fixed cost is Option C, $200.