The schedule of total cost for a firm in a price-taker market is given in the table. If the market price for this product is $50, which of the following output levels should this firm produce if it wants to maximize its profit?

A) 1
B) 2
C) 3
D) 4

Question

The schedule of total cost for a firm in a price-taker market is given in the table. If the market price for this product is $50, which of the following output levels should this firm produce if it wants to maximize its profit?

A) 1 
B) 2 
C) 3 
D) 4

Quizplus · Accepted Answer

To maximize profit in a price-taker market, the firm should produce at the output level where marginal revenue (MR) equals marginal cost (MC). In this case, we can calculate the marginal cost by taking the difference in total cost between each output level. For example, the marginal cost of producing 2 units is $110 - $90 = $20.

The table also provides the total revenue (TR) for each output level, which we can use to calculate the marginal revenue. Since a price-taker firm can sell all of its output at the market price of $50, MR equals $50 for all levels of output.

To determine the optimal output level, we should compare the marginal cost and marginal revenue for each possible level of output. The results are as follows:

- When producing 1 unit, MR = $50 and MC = $70, so the firm would incur a loss of $20.
- When producing 2 units, MR = $50 and MC = $20, so the firm would earn a profit of $60.
- When producing 3 units, MR = $50 and MC = $30, so the firm would earn a profit of $20.
- When producing 4 units, MR = $50 and MC = $40, so the firm would incur a loss of $10.

Therefore, the optimal output level for this firm is 2 units, which would maximize its profit at $60.

The Schedule of Total Cost for a Firm in a Price-Taker