Answer to Question #309895 in Economics of Enterprise for Hasan Srini

Question

The Mellow Cake corporation is facing a downward sloping demand curve for its Mellow Cakes deserts. In the table below you are provided with information on the firm’s marginal revenues and total costs. 

(Note: the Marginal revenues at a level Q in the table are the revenues at level Q+1 minus the revenues at level Q.)

Quantity Produced (Q) Marginal Revenue (Q) Total Cost (Q)

1 40 1

2 35 4

3 30 9

4 25 15

5 20 22

6 15 42

7 10 67

8 5 97

9 0 137

10 -5 187

1. Is the firm in this example a price taking firm? Explain why or why not. (5 pts.)

2. What is the firm’s optimal level of output? Explain why it is optimal. (5 pts.)

Answer 1

1. Is the firm in this example a price taking firm? Explain why or why not. (5 pts.)

This is a price taking firm because it is not able to influence prices in the market but rather follows the market prices. Shown by reducing Marginal revenue

2. What is the firm’s optimal level of output? Explain why it is optimal. (5 pts.)

9 units, because the margina revenue is 0 and the point where MR is zero is the optimal production point.