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?

Question

Henson

Business

24 April, 16:18

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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Melina Quinn · Answer 1

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