Question

Explain the profit maximization theory of the firm with the help of figure and compute profit maximizing output, price, TR and maximum profit from the given information; Demand function: P = 100-4Q & cost function: TC = 50+6Q2 .

Answer 1

Answer:

Since a perfectly competitive firm must accept the price for its output as determined by the product’s market demand and supply, it cannot choose the price it charges. Rather, the perfectly competitive firm can choose to sell any quantity of output at exactly the same price. This implies that the firm faces a perfectly elastic demand curve for its product: buyers are willing to buy any number of units of output from the firm at the market price. When the perfectly competitive firm chooses what quantity to produce, then this quantity—along with the prices prevailing in the market for output and inputs—will determine the firm’s total revenue, total costs, and ultimately, level of profits.