Question

A firm's manager is given the following information: To sell 4 units of output, a price of $132 must be charged; this level of output reflects marginal revenue of $102 and marginal costs of $60. If the firm wants to sell 5 units of output, a price of $122 must be charged; this reflects marginal revenue of $82 and marginal costs of $70. To sell 6 units of output, a price of $112 must be charged; at this level of output, marginal revenue will be $62 and marginal costs $80. What should the manager do?

Answer 1

Answer:

The answer is: sell 5 units of output and charge $122

Explanation:

As a general rule, if a company wants to maximize its profit, it must continue to produce and sell a product or service as long as the marginal revenue is higher than the marginal costs. When marginal revenue equals marginal cost, the company will have reached it maximum possible profit.

In this case if the company sells 6 units, its marginal cost is higher than its marginal revenue, so the company would be losing money.