Consider a firm that operates with a fixed marginal cost of $10 and faces a demand governed by the following relationship: Q = 100 - 5 P
What should the profit maximizing level of output be?
A) 15
B) 20
C) 25
D) 30

Question

Quizplus · Accepted Answer

To maximize profit, the firm should set its output where marginal cost (MC) equals marginal revenue (MR). First, we need to find the inverse demand function, which is P = 20 - 0.2Q. Then, to find MR, we differentiate the total revenue (TR = P*Q) with respect to Q, which gives MR = 20 - 0.4Q. Setting MR equal to MC ($10), we get 10 = 20 - 0.4Q, solving for Q gives Q = 25.

Consider a Firm That Operates with a Fixed Marginal Cost