Question

Refer to the figure below. During high-peak times, what price-quantity combination should the firm charge to maximize profit? MC DHigh MR High MRLow Drow O A) P1 and Q3 OB) P2 and Q3 OC) P1 and Q2 OD) P4 and Q3

Answer 1

Answer- option D) P​​​​​​4 and Q​​​​​​3.

A firm should produce that level of output where marginal cost is equal to marginal revenue(MC=MR). This is the profit maximising output. The price charged at this level of output is determined by the corresponding point on the demand curve.

From the above diagram we can see that, high peak time demand curve and marginal revenue curve is given by D​​​​​​High and MR​​​​​High   respectively. The firm will produce that level of output where MC=MR. The MC curve intersects the MR​​​​​High curve at output Q​​​​​​3. This is the profit maximising output during high peak times. The price charged at this level of output will be determined by the corresponding point on the demand curve at this level of output. The price charged corresponding to D​​​​​​High curve at output of Q​​​​​​3 is P​​​​​​4.  Hence the price charged during high peak times is P​​​​​​4.

option A is INCORRECT because price P​​​​​​1 does not correspond to the high peak demand curve at output of Q​​​​​​3.

Option B is INCORRECT because P​​​​​​2 represents the marginal revenue at output Q​​​​​​3 during high peak times.  This is not the price charged. This represents the marginal revenue at that level of output.

Option C is INCORRECT because price P​​​​​​1 is the marginal revenue during low times and Q​​​​​​2 is the determined by intersection of demand curve during low times and marginal cost. These prices and output does not correspond to high peak times demand curve and marginal revenue curve.