The above table summarizes the marginal cost of production at various quantity levels for a perfectly competitive firm.
-Refer to the table above. The perfectly competitive firm has a random demand with a 25 percent chance of being $5 and a 75 percent chance of being $9. What quantity should the firm produce to maximize its expected profit?

Question

Quizplus · Accepted Answer

To maximize expected profit, the firm should produce the quantity where marginal cost (MC) equals expected marginal revenue (EMR).

Expected marginal revenue (EMR) is calculated as:

EMR = Probability of low demand * Low price + Probability of high demand * High price - Marginal Cost

EMR = 0.25 * $5 + 0.75 * $9 - MC

EMR = $7 - MC

Setting EMR equal to MC:

MC = $7 - MC

2MC = $7

MC = $3.50

Thus, the firm should produce the quantity where MC = $3.50, which is a quantity of 130 units.

The Above Table Summarizes the Marginal Cost of Production at Various