Answer to Question #117444 in Microeconomics for Harshit Shukla

Question #117444
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?
1
Expert's answer
2020-05-21T11:24:26-0400

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.


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