A firm faces the following average revenue (demand) curve:
P = 120 – 0.02Q
where Q is weekly production and P is price, measured in cents per unit. The firm’s cost
function is given by TC = 60Q + 25,000. Assume that the firm maximizes profits.
a)
Calculate the level of production per week.
The profit-maximizing output occurs when MR (Marginal Revenue) = MC (Marginal Cost). When
demand cure is linear, MR will have twice the slope of the demand curve, thus:
MR = 120 – 0.04Q.
Marginal cost being the slope of total cost, means that MC =60.
Hence, when
MR = MC
120 – 0.04Q = 60
Q = 1500
