Question

Juan’s Software Service Company is a perfectly competitive firm. Juan’s total fixed cost is $25,000, its average variable cost for 1,000 service calls is $45, and its marginal revenue is $75. Juan’s makes 1,000 service calls a month. Juan’s makes an economic profit of ______ a month.

The answer is $5,000, but I don't understand how.

Answer 1

I understand, and I will help you :D

Total fixed costs (TFC) = $25,000
Average variable costs (AVC)= $45
Marginal Revenu (MR) = $75

Total service calls = 1,000 calls

(1) Find the Total costs (Total fixed costs + total variable costs)
Because AVCs are just an average *$45 per each 1 call*, you need to multiply $45 by the number of total calls \[= $45 \times 1000\]Total variable costs (TVCs) = $45,000

The fixed costs are already totals, so just add them to the total variable costs and you get your total costs = $70,000


(2) Next you need to find your total revenue (TR)

To do that, you need to multiply the marginal revenue (revenue per 1 call) by 1000
which is:\[ = $75 \times 1000\]Total Revenue = $75,000


(3) Total costs - total revenue = profit.
\[= $75,000-70,000\]= $5,000 as profit