Question

Suppose the marginal benefit of writing a contract is $100, independent of its length. Find the optimal contract length when the marginal cost of writing a contract of length L is:
a. MC(L) = 30 + 4L.b. MC(L) = 40 + 5L.

Answer 1

Answer:

a. 17.5

b. 12

Explanation:

Given that

Marginal cost = $100

The computation of optimal contract length is given below :-

Marginal benefit = Marginal cost (length )

a. $100 = 30 + 4L

L = 70 ÷ 4

= 17.5

b) 100 = 40 + 5L

L = 60 ÷ 5

= 12

Therefore, for calculating the optimal contract length simply we calculate both the equations equals with marginal benefit to the marginal cost (length)