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 find the profit-maximizing level of output, we need to compare the marginal cost (MC) to the market price ($10).

To find the marginal cost, we need to look at the change in total cost for each additional unit of output.

- Between 1 and 2 units, the total cost increases by $8, so the marginal cost is $8.
- Between 2 and 3 units, the total cost increases by $9, so the marginal cost is $9.
- Between 3 and 4 units, the total cost increases by $12, so the marginal cost is $12.

Since the market price of $10 is lower than the marginal cost for producing 2, 3, or 4 units, the firm should not produce those levels of output as they would result in losses.

Therefore, the only option is to produce 1 unit, but this will not result in any profit since the total revenue earned would only be $10 (1 unit x $10 per unit) while the total cost of production is $11 ($3 fixed cost + $8 variable cost for producing 1 unit).

Thus, the best choice is to produce 3 units since the marginal cost of producing 3 units is $9, which is lower than the market price of $10. At this level of output, the total revenue earned would be $30 (3 units x $10 per unit) while the total cost of production is $24 ($3 fixed cost + $9 variable cost for producing 3 units), resulting in a profit of $6.

The Following Table Gives the Average Total Cost of Production