ch8_example1 - Suppose that a competitive firms marginal...

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Suppose that a competitive firm’s marginal cost of producing output q is given by  MC(q) = 3 + 2q.  Assume that  the market price of the firm’s product is $9. a. What level of output will the firm produce? To maximize profits, the firm should set marginal revenue equal to marginal  cost.  Given the fact that this firm is operating in a competitive market, the  market price it faces is equal to marginal revenue.  Thus, the firm should set  the market price equal to marginal cost to maximize its profits: 9 = 3 + 2 q , or  q  = 3. b. What is the firm’s producer surplus? Producer surplus is equal to the area below the market price, i.e., $9.00, and  above the marginal cost curve, i.e., 3 + 2 q .   Because   MC   is linear, producer  surplus is a triangle with a base equal to $6 (9 - 3 = 6).   The height of the  triangle is 3, where 
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This note was uploaded on 04/07/2009 for the course ECON 302 taught by Professor Toossi during the Spring '08 term at University of Illinois at Urbana–Champaign.

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ch8_example1 - Suppose that a competitive firms marginal...

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