The schedule of total costs for a chair-manufacturing firm is presented in the table below. If the market price of chairs is $100, which of the output levels should this price-taker firm produce in order to maximize profit?
A)10
B)20
C)30
D)40

Question

The schedule of total costs for a chair-manufacturing firm is presented in the table below. If the market price of chairs is $100, which of the output levels should this price-taker firm produce in order to maximize profit? 
A)10 
B)20 
C)30 
D)40

Quizplus · Accepted Answer

To find the profit-maximizing output level, we need to calculate the marginal cost (MC) and marginal revenue (MR) of producing each chair.

MC is the additional cost of producing one extra unit of output, and can be calculated by taking the difference between successive total cost values. For example, the MC of producing the 11th chair is $25 - $20 = $5.

MR is the additional revenue generated by selling one extra unit of output, and is equal to the market price of the good since the firm is a price-taker. Therefore, the MR of producing each chair is $100.

To maximize profit, the firm should produce at the level where MC = MR. In this case, that occurs at an output level of 30 chairs, where MC = $50 and MR = $100. At any lower output level, the firm can increase profits by producing one more chair, since the additional revenue from selling that unit (MR) exceeds the additional cost of producing it (MC). At any higher output level, the firm can increase profits by producing one less chair, since the cost of producing that unit (MC) exceeds the revenue it generates (MR).

The Schedule of Total Costs for a Chair-Manufacturing Firm Is