(Table: Droids and Moisture Output)Use Table: Droids and Moisture Output.Luke Skywalker uses droids to operate a moisture farm in a perfectly competitive market on the planet Tatooine.A barrel of moisture sells for 50 republic credits.A droid costs 675 republic credits per month to rent.How many droids should Luke rent?
A)one
B)two
C)three
D)four

Question

(Table: Droids and Moisture Output)Use Table: Droids and Moisture Output.Luke Skywalker uses droids to operate a moisture farm in a perfectly competitive market on the planet Tatooine.A barrel of moisture sells for 50 republic credits.A droid costs 675 republic credits per month to rent.How many droids should Luke rent? 
A)one 
B)two 
C)three 
D)four

Quizplus · Accepted Answer

To maximize profit, Luke should rent the number of droids at which his marginal revenue from the additional barrel of moisture output provided by an additional droid is equal to the marginal cost of renting that additional droid.

From the table, we see that:
- The first droid provides an additional 15 barrels of moisture output, which generates revenue of 750 republic credits (50 credits per barrel).
- The second droid provides an additional 13 barrels of moisture output, which generates revenue of 650 republic credits.
- The third droid provides an additional 10 barrels of moisture output, which generates revenue of 500 republic credits.
- The fourth droid provides an additional 5 barrels of moisture output, which generates revenue of 250 republic credits.

Therefore, the marginal revenue of each additional droid decreases as more droids are rented. On the other hand, the marginal cost of each additional droid is constant at 675 republic credits.

To find the optimal number of droids, we should continue adding another droid as long as the marginal revenue of the additional barrel of moisture output exceeds the marginal cost of renting that droid. This occurs for the first three droids, but not the fourth. Therefore, Luke should rent three droids to maximize his profit.