If the competitive firm can sell its product at $16 per unit and the marginal costs of the firm are MC = 1,100 + 2Q, then the firm will produce:
A) 1,084 units.
B) 542 units.
C) 16 units.
D) 1,100 units.

Question

Quizplus · Accepted Answer

The profit-maximizing output level is where marginal revenue (MR) equals marginal cost (MC). Since this is a competitive firm, the price equals MR. Thus,

MR = Price = $16
MC = 1,100 + 2Q

Setting MR equal to MC and solving for Q, we get:

$16 = 1,100 + 2Q

2Q = $16 - $1,100 = -$1,084

Q = -$1,084 / 2 = -542

Since we cannot have negative quantities, this means the firm should not produce anything (i.e. shut down). However, if we restrict our attention to positive quantities, the closest choice is B) 542 units.

If the Competitive Firm Can Sell Its Product at $16