The figure given below represents a firm in a market characterized by many buyers and one seller.MC is the initial marginal cost of the seller.MC' denotes the marginal cost inclusive of the $1 transaction cost.On the other hand, buyers incur a transaction cost worth $2 represented by the vertical distance between D and D'.MR and MR' represent the marginal revenue curve corresponding to the demand curves D and D' respectively.

-Refer to Figure.Suppose the seller incurs an additional cost of $1 per unit of output to reduce the transaction costs of the buyers to zero.Determine the profit maximizing price and output when the buyers incur zero transaction cost.
A)Output = 2.5 units and price = $8.25
B)Output = 2.5 units and price = $6.5
C)Output = 3 units and price = $9
D)Output = 3 units and price = $6.5

Question

The figure given below represents a firm in a market characterized by many buyers and one seller.MC is the initial marginal cost of the seller.MC' denotes the marginal cost inclusive of the $1 transaction cost.On the other hand, buyers incur a transaction cost worth $2 represented by the vertical distance between D and D'.MR and MR' represent the marginal revenue curve corresponding to the demand curves D and D' respectively.

-Refer to Figure.Suppose the seller incurs an additional cost of $1 per unit of output to reduce the transaction costs of the buyers to zero.Determine the profit maximizing price and output when the buyers incur zero transaction cost.

-Refer to Figure.Suppose the seller incurs an additional cost of $1 per unit of output to reduce the transaction costs of the buyers to zero.Determine the profit maximizing price and output when the buyers incur zero transaction cost.
A)Output = 2.5 units and price = $8.25 
B)Output = 2.5 units and price = $6.5 
C)Output = 3 units and price = $9 
D)Output = 3 units and price = $6.5

Quizplus · Accepted Answer

When transaction costs are zero, the seller can charge a higher price. The profit-maximizing output is where marginal cost equals marginal revenue. With the additional $1 cost, the new price is $9 for 3 units.

The Figure Given Below Represents a Firm in a Market