Answer the question on the basis of the following demand and cost data for a specific firm. $ \quad$$ \quad$$ \quad$$ \quad$$\text { Demand Data }$ $ \quad$$ \quad$$ \quad$ $\text { Cost Data }$
$\begin{array}{|c|c|c|c|c|}
\hline&&(3)&\text { Total } \
\text { (1) } & \text { (2) } & \text { Quantit } & \text { Output } & \text { Total } \
\text { Price } & \text { Price } & \text { Y} & & \text { Cost }\
\hline \$ 50 & \$ 35 & 2 & 2 & \$ 45 \
\hline 45 & 30 & 3 & 3 & 55 \
\hline 40 & 25 & 4 & 4 & 70 \
\hline 35 & 20 & 5 & 5 & 90 \
\hline 30 & 15 & 6 & 6 & 115 \
\hline 25 & 10 & 7 & 7 & 145 \
\hline 20 & 5 & 8 & 8 & 180 \
\hline
\end{array}$ If columns 1 and 3 are this firm's demand schedule, maximum economic profit will be
A) $60.
B) $70.
C) $80.
D) $90.

Question

Quizplus · Accepted Answer

To find the maximum economic profit, we need to find the quantity at which marginal revenue (MR) equals marginal cost (MC). From the demand schedule, we can derive the following table:
$\begin{array}{|c|c|c|c|c|}
\hline &&
\text {Demand} &&
\text {Total Revenue} \
\text{Output} & \text{Price} & \text{Quantity} & \text{Total Revenue} &\text{Change}\
\hline 2 & 50 & 6 & 300 & \
\hline 3 & 45 & 9 & 405 & 105 \
\hline 4 & 40 & 12 & 480 & 75 \
\hline 5 & 35 & 15 & 525 & 45 \
\hline 6 & 30 & 18 & 540 & 15 \
\hline 7 & 25 & 21 & 525 & -15 \
\hline 8 & 20 & 24 & 480 & -45 \
\hline
\end{array}$
From this table, we can see that the marginal revenue for each additional unit is a constant $-5$. To find the marginal cost, we need to calculate the change in total cost for each unit of output:

$\begin{array}{|c|c|c|c|c|}
\hline &&
\text {Output} &&
\text {Total Cost} \
\text{Quantity} & \text{Price} & \text{Change} & \text{Total Cost} &\text{Marginal Cost}\
\hline 2 & 35 & & 45 & \
\hline 3 & 30 & 10 & 55 & 10 \
\hline 4 & 25 & 15 & 70 & 5 \
\hline 5 & 20 & 20 & 90 & 5 \
\hline 6 & 15 & 25 & 115 & 5 \
\hline 7 & 10 & 30 & 145 & 5 \
\hline 8 & 5 & 35 & 180 & 5 \
\hline
\end{array}$
We can see that the marginal cost is a constant $5$ for all units of output. Therefore, the profit-maximizing quantity is the one where $MR = MC$, which is at an output of 5 units. At this output level, price is $35$ and total cost is $90$, so the economic profit will be $35\times 5 - 90 = 175 - 90 = 85$. However, we need to subtract the fixed cost of $45$, so the maximum economic profit is $85 - 45 = 40$. Therefore, the correct answer is $\boxed{\text{(D) } \$90}$.

Answer the Question on the Basis of the Following Demand \quad

Answer the Question on the Basis of the Following Demand $\quad$