Suppose that Cheapo Industries,a perfectly competitive firm,currently produces 500 units of imitation ham spread for a total cost of $1,500.The marginal cost of the 500^th unit is $20,and the marginal revenue of the 500^th unit is $15.To maximize profits,Cheapo Industries should: A)continue to produce 500 units. B)produce more than 500 units but less than 1500 units. C)produce less than 500 units. D)produce more than 1500 units. E)stop producing at 500 units.

Question

Quizplus · Accepted Answer

In order to maximize profits, a perfectly competitive firm should produce at the point where marginal cost (MC) equals marginal revenue (MR) which is at the point where the slope of total revenue (TR) curve is equal to the slope of total cost (TC) curve.

Given that the marginal cost of producing the 500th unit is $20 and the marginal revenue of the 500th unit is $15, it would not be profitable for Cheapo Industries to produce any additional units beyond 500.

Therefore, the best choice is to continue producing 500 units and not produce more or less than the current quantity.

Suppose That Cheapo Industries,a Perfectly Competitive Firm,currently Produces 500 Units