Question

A firm faces the following demand and total cost schedules:

Demand		Total Cost
P ($)	Q	Q	TC ($)
20	1	1	2
18	2	2	6
16	3	3	11
14	4	4	18
12	5	5	26

Suppose that the firm is required to produce a whole number of items each month. Ho much does it produce and what is price. How do you know?.

Answer 1

Demand				Total Cost
P ($)=TR	Q	TR	MR	Q	TC ($)	MC
20	1	20	20	1	2	2
18	2	36	16	2	6	4
16	3	48	12	3	11	5
14	4	56	8	4	18	7
12	5	60	4	5	26	8

The profit-maximizing condition is that MR must be either greater than or equal to the MC.

As it can be seen in the table that by producing 4 units of output the MR which is $8 and MC is $7. In this case, MR is just greater than MC by $1 only. So it is a profit-maximising condition. If he produces 5 units than MR is $4 and MC is $8, which violates the profit-maximizing condition.

Hence the firm will produce only 4 units of output each month and he will charge $14 per unit.