Assume that the short-run cost and demand data given in the tables below confront a monopolistic competitor selling a given product and engaged in a given amount of product promotion. $ \quad$$ \quad$$ \quad$$ \quad$ $\text { Cost Data }$ $ \quad$$ \quad$$ \quad$ $\text { Demand Data }$
$\begin{array}{|c|c|c|c}
\begin{array}{c}
\text { Total } \
\text { Output }
\end{array} & \begin{array}{c}
\text { Total } \
\text { Cost }
\end{array} & \begin{array}{c}
\text { Quantity } \
\text { Demanded }
\end{array} & \text { Price } \
\hline 0 & \$ 25 & 0 & \$ 60 \
\hline 1 & 40 & 1 & 55 \
\hline 2 & 45 & 2 & 50 \
\hline 3 & 55 & 3 & 45 \
\hline 4 & 70 & 4 & 40 \
\hline 5 & 90 & 5 & 35 \
\hline 6 & 115 & 6 & 30 \
\hline
\end{array}$ What output and price levels will maximize the firm's profit in the short run?
A) 3 units and $45
B) 4 units and $40
C) 5 units and $35
D) 6 units and $30

Question

Assume that the short-run cost and demand data given in the tables below confront a monopolistic competitor selling a given product and engaged in a given amount of product promotion. $ \quad$$ \quad$$ \quad$$ \quad$   $\text { Cost Data }$    $ \quad$$ \quad$$ \quad$  $\text { Demand Data }$ 
$\begin{array}{|c|c|c|c}
\begin{array}{c}
\text { Total } \
\text { Output }
\end{array} & \begin{array}{c}
\text { Total } \
\text { Cost }
\end{array} & \begin{array}{c}
\text { Quantity } \
\text { Demanded }
\end{array} & \text { Price } \
\hline 0 & \$ 25 & 0 & \$ 60 \
\hline 1 & 40 & 1 & 55 \
\hline 2 & 45 & 2 & 50 \
\hline 3 & 55 & 3 & 45 \
\hline 4 & 70 & 4 & 40 \
\hline 5 & 90 & 5 & 35 \
\hline 6 & 115 & 6 & 30 \
\hline
\end{array}$ What output and price levels will maximize the firm's profit in the short run?
A) 3 units and $45
B) 4 units and $40
C) 5 units and $35
D) 6 units and $30

Quizplus · Accepted Answer

To maximize profit, the firm should produce where marginal revenue (MR) equals marginal cost (MC) and charge the price corresponding to that output level.

From the demand data, we can calculate the marginal revenue:
\begin{array}{|c|c|c|}
\hline 	ext { Quantity } & 	ext { Price } & 	ext { Total Revenue } \
\hline 0 & \$60 & - \
\hline 1 & 55 & 55 \
\hline 2 & 50 & 100 \
\hline 3 & 45 & 135 \
\hline 4 & 40 & 160 \
\hline 5 & 35 & 175 \
\hline 6 & 30 & 180 \
\hline \end{array}

The marginal revenue for each additional unit sold is as follows:
\begin{array}{|c|c|}
\hline 	ext { Quantity } & 	ext { Marginal Revenue } \
\hline 1 & \$55-\$60=-\$5 \
\hline 2 & \$50-\$55=-\$5 \
\hline 3 & \$45-\$50=-\$5 \
\hline 4 & \$40-\$45=-\$5 \
\hline 5 & \$35-\$40=-\$5 \
\hline 6 & \$30-\$35=-\$5 \
\hline \end{array}

The marginal cost for each additional unit produced is as follows:
\begin{array}{|c|c|}
\hline 	ext { Quantity } & 	ext { Marginal Cost } \
\hline 1 & \$40-\$25 = \$15 \
\hline 2 & \$45-\$40 = \$5 \
\hline 3 & \$55-\$45 = \$10 \
\hline 4 & \$70-\$55 = \$15 \
\hline 5 & \$90-\$70 = \$20 \
\hline 6 & \$115-\$90 = \$25 \
\hline \end{array}

The point where MR intersects MC is at 4 units of output. At that level of output, the price is $40. Therefore, the best choice is 4 units and $40.

Assume That the Short-Run Cost and Demand Data Given in the Tables