The following table gives the average total cost of production for various levels of output for a competitive price-taker firm
If the firm's fixed cost of production is $3 and the market price is $10, how many units should the firm produce to maximize its profit?
A) 1
B) 2
C) 3
D) 4

Question

The following table gives the average total cost of production for various levels of output for a competitive price-taker firm
 If the firm's fixed cost of production is $3 and the market price is $10, how many units should the firm produce to maximize its profit?
A) 1 
B) 2 
C) 3 
D) 4

Quizplus · Accepted Answer

To maximize profit, the firm should produce at the point where marginal cost (MC) equals price (P), which is where the MC curve intersects the horizontal line at the market price of $10. Looking at the table, the MC for producing 1 unit is $9, for producing 2 units it is $8, for producing 3 units it is $8, and for producing 4 units it is $9. Thus, producing 3 units will yield the highest profit as the MC equals price at this level of output.

The Following Table Gives the Average Total Cost of Production