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Suppose a competitive firm has​ cost, C​ =​(0.002q³​) ​+ (22q)​ + 750 Marginal​ cost, MC​ = 0.006q²​ + 22 and​ revenue, R​ = 80q.If the firm produces 150 units of​ output,

A. marginal profit​ > 0.
B. MR​ < MC.
C. R​ < C.
D. MR​ > MC.

1 Answer

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Final answer:

At an output of 150 units, marginal cost (MC = 157) for the firm exceeds marginal revenue (MR = 80), indicating that the firm is not maximizing its profit. To increase profits, the firm should reduce its output until MR = MC. Therefore, the correct answer is B. MR < MC.

Step-by-step explanation:

When analyzing a competitive firm’s decision on how much output to produce, two important factors are marginal revenue (MR) and marginal cost (MC). The profit-maximizing choice for a firm in perfect competition is where MR = MC. For this specific problem, the firm has a marginal cost of MC = 0.006q² + 22 and a constant marginal revenue since it is a competitive market, MR = 80 (price). At 150 units of output, MC is calculated as 0.006(150)² + 22 = 0.006(22500) + 22 = 135 + 22 = 157.

We can now compare MR and MC to determine the firm's optimal production level. Since MR (80) is less than MC (157) at Q = 150, the firm is producing at a quantity where MC exceeds MR. This implies that the firm is not maximizing its profits and should reduce output to increase profits. Thus, the correct answer would be B. MR < MC.

Understanding Profit Maximization in Competitive Markets

For a firm in perfect competition, profit maximization occurs where the revenue from selling an additional unit (MR) is exactly equal to the cost of producing that unit (MC). If MR < MC, the firm will lose profit on each additional unit, and thus it effectively increases profit by reducing output until MR = MC. If marginal costs exceed marginal revenue, then the firm will reduce its profits for every additional unit of output it produces.

User Mosquito Mike
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