Question

Use the following to answer questions (5) and (6):

A perfectly competitive firm has a short-run total cost function given by: TC = 10 + 2q + 2q², where q is the amount produced. Accordingly, the firm’s marginal cost is given by: MC = 2 + 4q; while its average variable cost is given by: AVC = 2 + 2q. Suppose the market price equals 10.

[5]        In order to maximize profit, this firm should produce ___ units.

1. 2

2. 4

3. 10

4. None of the above

[6]        Producing the profit maximizing quantity, this firm earns a profit equal to:

1. -10

2. -2

3. -1

4. 4

Answer 1

5
The firm produces at MC=P
2+4q=10
4q=8
q=2
the firm should produce 2 units
Option A
6
Option B
-2
===
Profit =TR-TC
TR=P*Q=2*10=20
TC=10+2q+2q^2
=10+2*2+2*2^2
=22
Profit =20-22=-2

THe profit is -$2