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31 January, 15:35

Suppose you are the manager of a watchmaking firm operating in a competitive market. Your cost of production is given by Cequals400plus2q squared , where q is the level of output and C is total cost. (The marginal cost of production, MC (q) , is 4 q; the fixed cost, FC, is $400 ). If the price of a watch is $80 , how many watches should you produce to maximize profits?

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  1. 31 January, 15:47
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    The quantity to maximize profit = 20 units

    Explanation:

    In a perfectly competitive market, profit is maximized at the quantity where the marginal cost is equal to marginal revenue.

    Note that the MC is the change in total cost as a result of a change in total production unit by a unit

    Marginal revenue is the change in total revenue as a result of selling additional unit of product. For a perfectly competitive it is equal to the selling price.

    To maximize profit, MR = MC

    MC - 4q MR - 80

    4q = 80

    q = 80/4 = 20

    The quantity to maximize profit = 20 units
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