A firm in a competitive market has the following cost structure: 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 profit?
A)1 unit
B)2 units
C)3 units
D)4 units

Question

A firm in a competitive market has the following cost structure:  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 profit?
A)1 unit 
B)2 units 
C)3 units 
D)4 units

Quizplus · Accepted Answer

To maximize profit, the firm should produce where Marginal Revenue (MR) = Marginal Cost (MC). At a price of $10, MR is also $10. The equation for MC is found by taking the derivative of the Total Cost equation (TC = FC + VC*q) with respect to quantity (q). This gives MC = 3 + 2q.

Setting MR = MC, we have 10 = 3 + 2q, and solving for q gives q = 3.5. Since we can't produce a fractional quantity, we round down to produce 3 units.

A Firm in a Competitive Market Has the Following Cost