Consider a competitive market with 50 identical firms. Suppose the market demand is given by the equation Q^D = 200 - 10P and the market supply is given by the equation Q^S = 10P. In addition, suppose the following table shows the marginal cost of production for various levels of output for firms in this market.
Output
Marginal Cost
0
--
1
$5
2
$10
3
$15
4
$20
5
$25
How many units should a firm in this market produce to maximize profit?

Question

Quizplus · Accepted Answer

A firm maximizes profit where marginal cost equals marginal revenue. In a competitive market, marginal revenue equals the market price. Setting Q^D = Q^S, we find P = $10. At P = $10, the marginal cost is $10 for 2 units, so the firm should produce 2 units.

Consider a Competitive Market with 50 Identical Firms