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 75 percent chance of being $5 and a 25 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 at the quantity level where marginal cost equals the expected price, which is a weighted average of the two possible prices based on their probabilities. 
Expected price = (0.75 x $5) + (0.25 x $9) = $6
Setting marginal cost equal to expected price: 
MC = $6
Quantity level at MC = $6 is 110 units. Thus, the firm should produce 110 units to maximize its expected profit.

The Above Table Summarizes the Marginal Cost of Production at Various