A firm in a competitive market has the following cost structure: 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 profit?

Question

A firm in a competitive market has the following cost structure:  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 profit?

Quizplus · Accepted Answer

To maximize profit, a firm should produce where marginal cost equals marginal revenue. The marginal cost equation for this firm is MC=2Q+3, and the marginal revenue equation is MR=$10. Setting these two equations equal to each other and solving for Q, we get:

2Q+3 = 10
2Q = 7
Q = 3.5

Since the firm cannot produce a fractional amount of units, the answer is 3 units. Producing any more units would result in a marginal cost higher than the market price, reducing profits.

A Firm in a Competitive Market Has the Following Cost