A profit-maximizing firm decides to produce 100 units of output.This implies that the firm will
A) produce on its lowest isoexpenditure line.
B) produce at a point where its isoexpenditure line is everywhere below the isoquant curve for 100 units of output.
C) produce at a point where its isoexpenditure line is tangent to the isoquant curve for 100 units of output.
D) produce where the marginal rate of technical substitution equals the wage rate.

Question

Quizplus · Accepted Answer

Producing at a point where the isoexpenditure line is tangent to the isoquant curve for 100 units of output means that the firm is producing at the point where the marginal rate of technical substitution (MRTS) equals the ratio of factor prices. This is the point at which the firm can maximize profits, as it is producing the most output it can with the given factor prices. Choosing any other point will result in either lower output or higher costs, decreasing profits.

A Profit-Maximizing Firm Decides to Produce 100 Units of Output