Suppose that Carol owns a property with a mineral spring.It costs zero for Carol to sell water to customers since buyers come to her property and bring their own bottles and fill them themselves.If Carol wants to maximize her profits from the sale of her mineral water, she should choose the output level
A)where the demand curve for water hits the vertical axis.
B)where demand is inelastic.
C)where demand is unit elastic.
D)demand is exhausted.

Question

Quizplus · Accepted Answer

The profit-maximizing output level for a firm selling a good with zero marginal cost (like Carol's mineral water) is where demand is unit elastic. At this output level, the price will be set at the point where marginal revenue equals marginal cost, and profit will be maximized. This is because, since the marginal cost is zero, any price above this level will result in a deadweight loss to consumers, and any price below this level will result in a deadweight loss to the producer. Therefore, the best choice for Carol to maximize her profits would be to produce at the output level where demand for her mineral water is unit elastic, which is when the revenue is maximized while keeping her cost at zero.

Suppose That Carol Owns a Property with a Mineral Spring