If the short-run marginal costs of producing a good are $20 for the first 400 units and $30 for each additional unit beyond 400, then in the short run, if the market price of output is $21, a profit-maximizing firm will

A) produce a level of output where marginal revenue equals marginal costs.
B) not produce at all, since marginal costs are increasing.
C) produce up to the point where average costs equal $21.
D) produce as much output as possible since there are constant returns to scale.
E) produce exactly 400 units.

Question

Laura Bond-Lucas · Accepted Answer

Final Answer : E, Explanation :  Given the market price of $21, the firm will produce up to the point where the marginal cost equals the market price. Since the marginal cost for the first 400 units is $20, which is less than the market price, the firm will produce 400 units. Beyond 400 units, the marginal cost increases to $30, which is above the market price, making it unprofitable to produce more. Therefore, the firm will produce exactly 400 units to maximize profits.

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