Question

A perfectly competitive firm has a cost function of C=Q²+20Q+700 and the equilibrium price is birr 100. find

A. The profit maximizing level of output

B. The maximum level of profit 

Answer 1

A) $C=Q^2+20Q+700$

$EP=MR=100 birr$

Differentiating cost function yields;

$C'=MC=2Q+20$

Profit maximization level of output =MR=MC

$100=2Q+20$

$Q=4UNITS$

B)The maximum level of profit;

$=TR-TC$

$TC=4^2+20(4)+700$

$=796birr$ $=400birr$

$TR=100Q=100*4=400 Birr$

$Profit=400-796=-396birr$

Negative profit implies financial loss.