if a profit maximizing firm facing a linear demand curve is operating where |?| = 1,...

if a profit maximizing firm facing a linear demand curve is operating where |?| = 1, i.e. the unit elastic portion of the demand curve, what must marginal cost be? Draw this on a graph (recall from your answer to #1 that MR is twice as steeply sloped as demand). ( 2 pts)

Expert Solution

Answer - The profit maximizing firm earn maximum profit where its marginal cost is equal to marginal revenue. It means MC = MR is the basic condition for profit maximization. MR is twice as steep sloped as demand curve. The MR curve hit X-axis when demand curve reaches at its half. We draw a perpendicular at point where MR hit x-axis. This perpendicular intersect demand curve at its mid point. We know that elasticity is equal to one at midpoint of demand curve.

The firm is earning maximum profit at the point where elasticity is equal one. It means MR must be equal to MC this point. At this output level MR is 'zero' therefore marginal cost (MC) must be zero. Look at the diagram. Output measured on x-axis and price, revenue and cost are measured on y-axis. MR hit x-axis at point 'Q'. This is also a profit maximizing output point. Thus MC will equal to MR. The price will be 'P*'.

Rahul Sunny answered 2 years ago

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