The schedule of total cost for a firm in a price-taker market is given in the table.If the market price for this product is $50,which of the following output levels should this firm produce if it wants to maximize its profit?

A)1
B)2
C)3

Question

The schedule of total cost for a firm in a price-taker market is given in the table.If the market price for this product is $50,which of the following output levels should this firm produce if it wants to maximize its profit?

A)1 
B)2 
C)3

Quizplus · Accepted Answer

To maximize profit, the firm should produce where marginal cost equals marginal revenue. The marginal cost is the change in the total cost when output increases by one unit. We can calculate the marginal cost by finding the difference in the total cost between two adjacent output levels. For example, the marginal cost of increasing output from 1 to 2 is $25. The marginal revenue is the market price of $50 since the firm is a price-taker. We can see that the marginal cost is less than the marginal revenue for output levels 1 to 3, but is greater than the marginal revenue for output levels 4 and 5. Therefore, the firm should produce 3 units to maximize profit. At this output level, the marginal cost is $50 which is equal to the marginal revenue.

The Schedule of Total Cost for a Firm in a Price-Taker