A perfectly competitive firm has an 80 percent probability of a high demand of $10 and a 20 percent chance of a low demand of $8. To maximize expected profit, the firm should produce the quantity that sets the marginal cost equal to_______ .

Question

Quizplus · Accepted Answer

To maximize expected profit, the firm needs to produce the quantity at which marginal cost is equal to expected marginal revenue. We can use the expected price ($9.60) as the expected marginal revenue.

The marginal cost of producing an additional unit is constant across both high and low demand scenarios. Therefore, the marginal cost is simply the cost of producing one additional unit, and is not affected by the demand.

Given this information, the profit-maximizing quantity is the one where the marginal cost is equal to the expected price:
Marginal cost = $9.60

Therefore, the answer is D) $9.60.

A Perfectly Competitive Firm Has an 80 Percent Probability of a High