A firm uses a single plant with costs C = 160 + 16Q + .1Q2 and faces the price equation P = 96 - .4Q.
Find the firms profit maximizing price and quantity. What is profit?
The firm's production manager claims that the firms average cost of production is minimized at an output of 40 units. Furthermore, she claims that 40 units is the firms profit maximizing level of output. Explain whether these claims are correct.
Could the firm increase its profit by using a second plant (with costs identical to the first) to produce the output in part (a)? Explain.
In this problem a cost function and price equation are given. By using these functions, the profit maximizing price level and output level are evaluated. Further, the distinction between the output level that minimizes the average cost and, the profit maximizing output level is also illustrated in the solution.