monopolistically competitive firm faces the following demand schedule for its product:
Price ($) 30 27 24 21 18 15 12 9 6 3
Quantity 3 6 9 12 15 18 21 24 27 30
The firm has total fixed costs of $9 and a constant marginal cost of $3 per unit. The firm will maximize
profit with
a. 9 units of output.
b. 15 units of output.
c. 21 units of output.
d. 30 units of output.
Answers
Answer:
Explanation:
A monopolistically competitive firm faces the following demand schedule for its product: |Price ($) |10| 9| 8 |7 |6| 5| 4 |3 |2| 1...
The correct answer is (a) 6 units of output.
Given:
Price ($) 30 27 24 21 18 15 12 9 6 3
Quantity 3 6 9 12 15 18 21 24 27 30
To Find:
maximize profit
Solution:
The amount of output the company should generate to maximize profits is when marginal revenue (MR) equals marginal cost. (MC).
The change in total revenue divided by the change in quantity is the marginal revenue, which results from producing one additional unit:
Marginal revenue = (Change in total revenue) / (Change in quantity)
We can determine the change in total income and the change in quantity for each unit of output using the demand schedule:
Refer Figure 1
The change in total revenue and the change in quantity are:
Refer Figure 2
The marginal revenue is therefore constant at $18 per unit.
The marginal cost is given as $3 per unit.
The profit-maximizing level of output occurs where MR = MC.
MR = MC
$18 = $3
Therefore, the firm should produce 6 units of output.
To confirm that this is the profit-maximizing level of output, we can compare the total revenue and total cost at this level of output:
Total revenue = Price x Quantity
Total revenue = $15 x 18
Total revenue = $270
Total cost = Fixed cost + Variable cost
Total cost = $9 + ($3 x 18)
Total cost = $63
Profit = Total revenue - Total cost
Profit = $270 - $63
Profit = $207
At 6 units of output, the firm earns a profit of $207, which is the maximum profit it can earn.
Therefore, the correct answer is (a) 6 units of output.
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