Question: 1. Consider a firm with AVC = $5 = MC for all relevant levels of output. The fixed costs of running its operations are $250,000

1. Consider a firm with AVC = $5 = MC for all relevant levels of output. The fixed costs of running its operations are $250,000 and the base of operations could be sold for $80,000. The firm is currently selling 100,000 units at a price of $10.

a. Calculate the firm's average costs, AC, as would be measured by an economist (e.g. economic cost versus accounting cost).

b. Calculate the firm's economic profit. Use the formula for profit that involves P, q and AC and their corresponding values according to the information given above.

c. Suppose a customer offers to buy 15,000 units at a price of $7 each. Using the same techniques as in your answer to (b), is this profitable?

d. Should the firm accept the offer of $7 each for 15,000 additional units? Explain.

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