Question

Consider a small firm that provides tours to visitors in a large city. The market for tours is perfectly competitive in the city. The firm has no fixed costs, so if it does not provide any tours in a day, it has a cost of zero. The daily cost of providing tours is listed in the table below.

Cost of providing tours

Total Tours	Cost of Providing Tours
1	$45
2	$85
3	$120
4	$150
5	$175
6	$195
7	$210
8	$230
9	$255
10	$285
11	$320
12	$360

Part 1   (1 point)

See Hint

Suppose the price of a tour is $40. If the firm is a profit-maximizing firm, it would provide a number of tours such that its marginal cost equals $ _____________  .

Part 2   (2 points)

The lowest number of tours that the firm could provide, for the marginal cost to equal what you answered in Part 1, is __________    units.

The highest number of tours that the firm could provide, for the marginal cost to equal what you answered in Part 1, is ____________     units.

Part 3   (1 point)

You may assume that the tour provider will provide a tour even if it breaks even for that particular (marginal) tour. To maximize profits, the firm should provide ________     tours.

Answer 1

Part 1: $40

Profit maximizing seller has his MC= MR. Here,  MR = MC =40. So he should equate MC with MR for output decision.

Part 2: 2 units

His MC = MR in two places in the given schedule. At quantity =2 units (85 - 45)/ (2-1) = 40 is the lower output level. So, when MC=MR=40, he can sell at least 2 units.

Part 3: 12

His MC = MR in two places in the given schedule. At quantity = 12 units is the second place where MC = MR = 40. ( 360 - 320)/ (12 - 11) = 40. So maximum units he can provide is 12

Part 4: 12 tours

Profut = total revenue (that is, price *quantity) - total cost

When quantity = 2, profit = 80 - 85 = -$5

When quantity = 12, profit = 480 - 360 = $120 Thus, he maximises profits when he provides 12 tours