Eric provides cheese (H) and milk (M) to the market with the following total cost function C(H, M) = 10 + 0.4 H² + 0.2M².The price of cheese and milk in the market are $2 and $5 respectively.Assume that the cheese and milk markets are perfectly competitivWhat output of milk maximizes profits?

Question

Quizplus · Accepted Answer

To maximize profits, Eric should produce where marginal cost (MC) equals marginal revenue (MR). In a perfectly competitive market, price equals marginal revenue, so we can set $5 as the MR in this case. The MC for milk can be found by taking the partial derivative of the total cost function with respect to M: MC = 0.2² Setting MC equal to MR: 0.2² = 5 Solving for S1: S1 = 12.5 Therefore, the optimal output of milk that maximizes profits is 12.5.

Eric Provides Cheese (H) and Milk (M) to the Market