Suppose that a price-taking firm charges $12 for its product and has a cost function given by C(Q) = 2Q + (Q2/60). The corresponding marginal cost is given by MC(Q) = 2 + (Q/30). How much output should the firm produce? What if the firm has $2,000 of avoidable fixed costs?
What will be an ideal response?
A price-taking firm will produce the level of output for which P = MC. For this firm, 12 = 2 + (Q/30) implies that Q = 300. The profit associated with 300 units of output is given by ? = (12 × 300) - (2 × 300) + (3002/60) = 4,500. Since the firm has no sunk fixed costs, the profit from shutting down would be zero. Therefore, the firm should produce 300 units of output.
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A) demand. B) supply. C) need. D) greed.
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