Jiang’s Pussycats sells ceramic kittens. The marginal cost of producing a partic

Question

Jiang’s Pussycats sells ceramic kittens. The marginal cost of producing a particular kitten depends on how many kittens Jiang produces, and is given by the formula MC = 0.8Q. Thus, the first kitten Jiang produces has a marginal cost of $0.80, the second has a marginal cost of $1.60, and so on. Assume that the ceramic kitten industry is perfectly competitive, and Jiang can sell as many kittens as she likes at the market price of $16.

a. What is Jiang’s marginal revenue from selling another kitten? (Express your answer as an equation.)

b. Determine how many kittens Jiang should produce if she wants to maximize profit. How much profit will she make at this output level? (Assume fixed costs are zero. It may help to draw a graph of Jiang’s marginal revenue and marginal cost.)

c. Suppose Jiang is producing the quantity you found in (b). If she decides to produce one extra kitten, what will her profit be?

d. How does your answer to part (c) help explain why “bigger is not always better”?

Explanation / Answer

a. The marginal revenue will equal price as the market is perfectly competitive and each firm is price taker. Thus MR=P=AR= 16

b. Profit max condition is P=MC

16 = 0.8q

q = 16/0.8 = 20 units to max profits

Profits = TR-TC = P*Q-TC = 20*16-0.4*(400) = 160

If q= 21

TR = 21*16 = 336

TC = 0.4*(21*21) =176.4

Profits = TR-TC = 336-176.4 = 159.6

The profits fall after one more unit of production.

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