Chapter 10R, Problem 4MCQ

To determine

The profit-maximizing output level

Answer to Problem 4MCQ

(c) 5.

Explanation of Solution

At the output level of 5 units, the given constant marginal revenue of $16 is equal to the marginal cost of the 5th unit, i.e., $16. It satisfies the profit-maximizing condition. Hence, the firm will produce 5 units to maximize the profit.

Below the 5^th unit, the marginal cost is $14 which is less than $16 hence there is an opportunity to earn higher profits. On the other hand, at the 6^th unit, the marginal cost is $20 which is higher than the marginal revenue. This will reduce the profit since the marginal cost is higher than the marginal revenue.

Economics Concept Introduction

Introduction:

The profit-maximizing level of output is where the marginal revenue is equal to the marginal cost of the last unit produced. Here, marginal revenue is the change in total revenue due to the sale of an additional unit of output. Similarly, marginal cost is the addition to the total cost due to the production of an additional unit of output.