Question

Quantity	Total Cost
0	100
1	102
2	116
3	154
4	228
5	350
6	532
7	786
8	1124

Use the table above to answer the following question.

Assume a perfectly competitive firms cost structure is given by the table above, and that the market price in this industry is $58. If the firm is profit maximizing, how much should they produce?

Answer 1

It shall be noted that the market structure is Perfect competition.

The equilibrium in perfect comeptition is given by: P = MC, for profit maximization

As long as P > MC, the perfectly competitive firm should increase the production, but as soon as P < MC, it should stop the production.

The data as provided is as follows:

Quantity	Total Cost	P	MC
0	100	58	-
1	102	58	2
2	116	58	14
3	154	58	38
4	228	58	74
5	350	58	122
6	532	58	182
7	786	58	254
8	1124	58	338

The marginal cost (MC) is the change in total cost with the increase in production of output by 1 unit.

Thus, marginal cost MC column has been provided.

It shall be observed that at Quantity = 3, MC = 38 and P = 58 and thus, P > MC

But as soon as Quantity = 4, MC = 74, which is higher than P=58

Thus, the firm shopuld not produce Quantity=4

Hence, the perfectly comeptitive firm should produce Quantity = 3

Thus, equilibrium profit maximizing Quantity is 3

Thus, the firm should produce 3 units of output