Question

Answer the question on the basis of the following demand and cost data for a specific firm.

Demand Data			Cost Data
(1) Price	(2) Price	(3) Quantity	Output	Total Cost
$11.00	$10.00	6	6	$61
9.99	8.85	7	7	62
9.00	8.00	8	8	64
8.00	7.00	9	9	67
7.10	6.10	10	10	72
6.00	5.00	11	11	79
5.15	4.15	12	12	86

If columns (1) and (3) of the demand data shown are this firm's demand schedule, the profit-maximizing level of output will be

Multiple Choice

• 12 units.

• 8 units.

• 10 units.

• 9 units.

Answer 1

Answer: 8 units

(1) Price	(3) Quantity	Total revenue ($)	Marginal revenue ($)	Total Cost	Marginal cost ($)
$11.00	6	66	----	$61	----
9.99	7	69.93	3.93	62	1
9.00	8	72	2.07	64	2
8.00	9	72	0	67	3
7.10	10	71	-1	72	5
6.00	11	66	-5	79	7
5.15	12	61.8	-4.2	86	7

Profit maximization condition:

Profit is maximum when (MC) Marginal cost = (MR) Marginal revenue

MC = MR = $2 at 8^th unit of output.

Formulas used:

Total revenue = Price * Quantity

Marginal revenue = Total revenue of n – Total revenue of n-1

Marginal cost = Total cost of n – Total cost of n-1

Calculation:

(1) Price	(3) Quantity	Total revenue ($)	Marginal revenue ($)	Total Cost	Marginal cost ($)
$11.00	6	11*6=66	----	$61	----
9.99	7	9.99*7=69.93	69.93-66=3.93	62	62-61=1
9.00	8	9*8=72	72-69.93=2.07	64	64-62=2
8.00	9	8*9=72	72-72=0	67	67-64=3
7.10	10	7.10*10=71	71-72=-1	72	72-67=5
6.00	11	6*11=66	66-71=-5	79	79-72=7
5.15	12	5.15*12=61.8	61.8-66=-4.2	86	86-79=7