Question

(b) 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

Profit maximazing quantity is at the point where ;

$MC =MR$

$\therefore$ $4q+5=25$

$4q=20$

$q=5$

If the firm produces 3 units ,then it is producing below the firms profit maximazing quantity/output.

In the longrun ,firms in perfectly competetive industry earn zero economic profits.