(i) What is the profit-maximizing price and output level? Solve this algebraical
ID: 1188650 • Letter: #
Question
(i) What is the profit-maximizing price and output level? Solve this algebraically for equilibrium P and Q and also plot the MC, D and MR curves and illustrate the equilibrium point.
(ii) What profit do you expect that the firm will make in the first year?
(iii) Do you expect this profit level to continue in subsequent years? Why or why not?
Explanation / Answer
(i) What is the profit-maximizing price and output level? Solve this algebraically for equilibrium P and Q and also plot the MC, D and MR curves and illustrate the equilibrium point. Three units of output maximize profit, since (1) P=MR=16>10=minimum AVC and (2) 3 units of output is the largest level of output at which MR>MC. ============================================================================================================================================================================================= (ii) What profit do you expect that the firm will make in the first year? third unit increases profit by $3, since MR-MC=16-13=$3 at that quantity ============================================================================================================================================================================================= (iii) Do you expect this profit level to continue in subsequent years? Why or why not? If a 4th unit is produced, however, then that unit reduces profit by $1, since MR=MC=16-17=-$1 at that quantity.
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