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

Question

Quizplus · Accepted Answer

To maximize profits, the producer should set the output level where marginal cost equals marginal revenue. Using the cost function provided, we can find the marginal cost of producing cheese:

MC(H) = 0.4S1U1P12S1S1P0

The marginal revenue of producing cheese is the price of cheese, which is $2.

Setting MC(H) = MR = $2:

0.4S1U1P12S1S1P0 = 2

Simplifying:

S1U1P12S1S1P0 = 5

Since the demand in the market is perfectly competitive, we can assume that P0 = 1. Therefore:

S1U1P12S1 = 5

To find the optimal output level of cheese, we need to solve for H:

H = S1U1P12 = 2.5

Therefore, the optimal output level of cheese is 2.5. The answer is B.

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