Question

Using the linear approximation system to estimate the profit maximizing price requires that the managers know the costs of production and

	the production function
	one price and quantity of demand
	two prices and quantities of demand
	decision-making process of the marketplace

Answer 1

Option C.

• Using the linear approximation system to estimate the profit maximizing price requires that the manager's known the costs of production and two price's and quantities of demand.
• Firms are said to maximize their profits when they produce goods at a point where the marginal cost equals the marginal revenue.
• This point is termed as the profit maximization point and the price set at this point is called as profit maximizing price, while the quantity set at this point is called as profit maximizing quantity.
• Therefore using linear approximation, we get two points for price, which is the orginal price charged by the seller's and the second one is the price at profit maximization point.
• Similarly we get two quantities of demand, one is the orginal quantity and the other one is the quantity of demand at profit maximizing point.
• A profot maximizing firm must be well aware of these two points and also the cost of production in order to maximize its profits.