Question

Suppose your firm has a marginal revenue given by the equation MR = 10 - Q where Q is the quantity produced and sold. This means that the seventh unit of output brings in 10 - 7 = $3 of additional revenue. The marginal cost for your firm is given by the equation MC = 2 + Q. This means that the seventh unit of output increases the marginal cost by 2 + 7 = $9. If the firm produces the seventh unit of output, marginal cost will be marginal revenue. In which of the following cases, will the profit of the firm be maximized? A. When the marginal cost of producing an additional unit equals the marginal revenue from that unit. B. When the average cost of producing an additional unit equals the marginal revenue from that unit. C. When the marginal cost of producing an additional unit is less than the marginal revenue from that unit. D. When the average cost of producing an additional unit is less than the marginal revenue from that unit. The profit-maximizing level of output is units.

Answer 1

Answer:

The answer is: A) When the marginal cost of producing an additional unit equals the marginal revenue from that unit.

Explanation:

In economics, we assume that a company´s main goal is to maximize its profit. In order for any company do to this, the marginal cost (MC) of producing an extra unit of production must equal the marginal revenue (MR) obtained by selling that extra unit of production.

Theoretically, in perfect market conditions, MR=MC in the equilibrium point between quantity supplied and quantity demanded. But on real world conditions elasticity of both demand and supply alter the curves.