The following table gives the average total cost of production for various levels of output for a competitive price-taker firm
If the firm's fixed cost of production is $3 and the market price is $10, how many units should the firm produce to maximize its profit?
A)1
B)2
C)3

Question

The following table gives the average total cost of production for various levels of output for a competitive price-taker firm 
If the firm's fixed cost of production is $3 and the market price is $10, how many units should the firm produce to maximize its profit?
A)1 
B)2 
C)3

Quizplus · Accepted Answer

To maximize profit, the firm should produce where marginal cost (MC) equals marginal revenue (MR), which is also where average total cost (ATC) is minimized. Based on the given table, the MC for the firm is the change in total cost (TC) divided by the change in output, which is the difference between successive ATC values. For example, the MC from producing 2 units to producing 3 units is ($28 - $20) / (3 - 2) = $8. The MR for a competitive price-taker firm is equal to the market price, which is $10 in this case. The ATC is given in the table. 
The following table shows the MC and MR for various levels of output.

Output | ATC | MC | MR
-------|-----|----|----
1      | $13 | N/A| $10
2      | $11 | $7 | $10
3      | $10 | $8 | $10
4      | $12 | $14| $10
5      | $16 | $24| $10

The firm should produce 3 units, where MC equals MR, to maximize profit. At this level of output, the total cost is $30 ($3 fixed cost + $8 variable cost x 3). The total revenue is $30 (3 units x $10 market price). Therefore, the profit is $0.

The Following Table Gives the Average Total Cost of Production