Question

A firm in a perfect competitive market structure faces a marginal cost function given
by
MC(Q) = 4Q + 5
where Q represents quantity of output produced. This firm earns marginal revenue of
Rs 25 on each unit sale of its output. Suppose this firm decides to produce 3 units of
output, is this a profit maximising decision by the firm? If not, how much should this
firm produce to earn maximum profits? In the long-run will this firm earn negative
economic profits, positive economic profits, or zero economic profits?

Answer 1

The profit maximazing descion for a competetive firm is at a place where marginal cost is equal to marginal revenue.

$MC=MR$

The profit maximazing quantity is therefore

$4Q+5=25$

$4Q=20$

$Q=5$

Inoder to maximize profit the firm,it should be producing 5 units.

In the long run ,firms in perfectly competetive industry earn a zero economic profit.