Question

Market demand is given as QD = 120 - P. Market supply is given as QS = 4P. Each identical firm has MC = 6Q and ATC = 3Q. What quantity of output will a typical firm produce?

Option 1: 10 units
Option 2: 15 units
Option 3: 20 units
Option 4: 25 units

Answer 1

A typical firm in this market will produce at the quantity where the marginal cost equals the market price which is found where supply equals demand. The equilibrium price is 24, leading to an output of 4, not matching any of the options directly, with the closest being 10 units.

Step-by-step explanation:

The quantity of output that a typical firm will produce is determined by the point where the market supply equals the market demand. Since the cost of producing another unit is represented by the marginal cost (MC), a profit-maximizing firm will produce up to the point where MC equals price P. Price is found where QD (market demand) equals QS (market supply).

First, to find the equilibrium price, we need to set QD equal to QS:

• 120 - P = 4P
• 120 = 5P
• P = 24

Now, we plug P into the MC equation to find the output Q:

• MC = 6Q
• 6Q = P
• 6Q = 24
• Q = 4

The calculation shows that the output per firm is not listed in the options given. However, based on the closest value, we would choose 10 units.