Question

Bitcom,a manufacturer of electronics, estimates the following relation between marginal cost of production and monthly output MC=$150+0.005Q What does this function imply about the effect of the law of diminishing returns on Bitcom's short-run cost function? Calculate the marginal cost of production at 1,500, 2,000, and 3,500 units of output assume Bitcom operates as a price taker in a competitive market what is this firm's profit maximizing level of output if the market price is $175?

Answer 1

The MC curve shows that as the value of Q increases or as the production increases, the Marginal Cost also increases for all levels of output. So, in the short run, the cost of the Bitcom will always increase given the above marginal cost curve. It also means that the firm is operating in a stage of diminishing returns to the factor.

Marginal cost at output=1500: 150+.005*1500= $ 157.5

At output 2000: 150+.005*2000= $ 160

At output 3500: 150+.005*3500= $ 167.5

The profit maximising level of output is where the Marginal cost equals the marginal revenue. In case of the competitive market, the marginal revenue is equal to the price of the product, as the firm used to be a price taker.

So, MC=price

150+.005Q=175

Q=(175-150)/.005= 5000 units.