Question

The Humdrum Company produced 10,000 doldrums last year. It sold the doldrums at a price of...

The Humdrum Company produced 10,000 doldrums last year. It sold the doldrums at a price of $5 each, but the average cost of producing each doldrum was only $3. With a profit margin of $2 per unit, should the company have produced more if it wanted to maximize profits?

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Answer #1

For profit maximization a firm must produce and sell a level of output at which marginal revenue is equal to price. In this case we have no information whether this average cost was constant at $3 for any level of output or it was $3 only when a total of 10000 doldrums are produced. Moreover no information is available regarding marginal cost. Hence we conclude that

  • Firm could have made higher profits by selling more if its marginal revenue was greater than marginal cost
  • If price of $5 is fixed by the market, then it could have made higher profits by selling more if its marginal cost was less than $5.
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