(There is no error in this question. Even though MR is not equal MC anywhere, th

Question

(There is no error in this question. Even though MR is not equal MC anywhere, there is a correct answer.) A firm has the above marginal revenue and marginal cost schedule. To maximize profit, this firm should produce

Select one:

a. 4 units only

b. 4 or 5 units

c. 3 or 4 units

d. 5 units only

e. 3 units only

MR MC increase output from 0 unit to 1 unit 8 1 increase output from 1 unit to 2 units 8 6 increase output from 2 units to 3 units 8 7 increase output from 3 units to 4 units 8 9 increase output from 4 units to 5 units 8 9

Explanation / Answer

To maximize its profits, firm should produce up to a level where MR becomes equal to MC. If MC becomes more than MR, this means that firm has started losing up on its profits as every additional unit will have a Marginal cost more than Marginal revenue. Production can only be increased to a level where Marginal cost does not exceed Marginal Revenue. In this particular question, the firm should produce only 3 units as production of four units will lead Marginal cost to exceed Marginal revenue.

Hence, Correct Answer is Option E => 3 units only.

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