The figure given below represents a firm in a market characterized by many buyers and one seller.MC is the initial marginal cost of the seller.MC' denotes the marginal cost inclusive of the $1 transaction cost.On the other hand, buyers incur a transaction cost worth $2 represented by the vertical distance between D and D'.MR and MR' represent the marginal revenue curve corresponding to the demand curves D and D' respectively.

-Refer to Figure.Determine the profit maximizing price and output when MC' is the marginal cost of the seller and the transaction cost incurred by the buyer is $2.
A)Output = 2.5 units and price = $8.25
B)Output = 2.5 units and price = $6.5
C)Output = 3 units and price = $9
D)Output = 3 units and price = $6.5

Question

The figure given below represents a firm in a market characterized by many buyers and one seller.MC is the initial marginal cost of the seller.MC' denotes the marginal cost inclusive of the $1 transaction cost.On the other hand, buyers incur a transaction cost worth $2 represented by the vertical distance between D and D'.MR and MR' represent the marginal revenue curve corresponding to the demand curves D and D' respectively.

-Refer to Figure.Determine the profit maximizing price and output when MC' is the marginal cost of the seller and the transaction cost incurred by the buyer is $2.

-Refer to Figure.Determine the profit maximizing price and output when MC' is the marginal cost of the seller and the transaction cost incurred by the buyer is $2.
A)Output = 2.5 units and price = $8.25 
B)Output = 2.5 units and price = $6.5 
C)Output = 3 units and price = $9 
D)Output = 3 units and price = $6.5

Quizplus · Accepted Answer

The profit-maximizing price and output occur where the seller's marginal cost curve (MC') intersects the demand curve. The transaction cost shifts the effective demand curve downward by $2, affecting the buyer's willingness to pay. The correct choice must account for this shift and identify the point where the adjusted demand curve intersects MC'. Choice A correctly identifies this intersection, considering the transaction cost.

The Figure Given Below Represents a Firm in a Market