The following figure depicts a specific firm's production with respect to the number of machine used.

-Refer to the figure above.If the rental price of machines is $120 per day and the value of one unit of output is $20,how many machines should the firm rent to maximize profits?

Question

The following figure depicts a specific firm's production with respect to the number of machine used.
 
-Refer to the figure above.If the rental price of machines is $120 per day and the value of one unit of output is $20,how many machines should the firm rent to maximize profits?

Quizplus · Accepted Answer

To maximize profits, a firm should rent the number of machines where the marginal revenue product (MRP) of the last machine rented is equal to the rental price of the machine. The MRP is calculated as the marginal product (MP) of the machine multiplied by the value of one unit of output. Without the figure, we can't calculate the exact MP for each machine, but given the rental price of $120 per day and the value of one unit of output being $20, the firm should rent machines until the additional revenue generated by the last machine rented is just equal to $120. Since the correct answer is provided as option B (3 machines), it implies that renting 3 machines generates an additional revenue equal to the rental cost of $120, thus maximizing profits.

The Following Figure Depicts a Specific Firm's Production with Respect