Question

Suppose a firms MR = 12-2Q. Further, suppose that the firm’s MC = 2. What is the profit maximizing quantity (Q)? Show all your work and, most importantly, explain why your technique will lead to the profit maximizing output level

Answer 1

The profit maximizing condition for firms is

Marginal revenue = Marginal cost

Here MR= 12-2Q and MC=2

Under profit maximizing condition,

                          MR= MC

           or, 12- 2Q=2 or, 2Q= 10 or Q=5 which is the profit maximizing output of the firm

The main objective of firms in a competitive market is to choose optimum output level that maximizes their profits. To achieve this, firms set to increase or decrease their output level at point where marginal revenue becomes equal to marginal cost and price is set higher than average variable cost.