Figure 94 Which of the following statements is TRUE I If the

(Figure 9.4) Which of the following statements is TRUE?

I. If the firm is producing 5 units of output, it should expand output to increase profits because P > MC.

II. At a price of $16, the firm\'s profits would rise from raising its price.

III. The profit-maximizing quantity is 600 units.

IV. The profit-maximizing price is $13.

Solution

Statement IV is correct

Reason : Any firm maximizes the gap between Total Revenue and Total Cost, and the gap is maximum when firm produce quantity corresponding to the price which comes after equating Marginal Cost and Marginal Revenue.

Here corresponding to price $13 we have MR = MC and quantity = 354 units are the profit maximizing points

Maximum Profit = ($13-$6) * 354 = $2478

Statemet I is incorrect as expanding output to 600 units decreases profit to ($8-$8)*600=0

Statement II is incorrect as at price 16$ profit will be (16$-8$)*200=$800

Statement III is incorrect as at 600 quantity price charged = MC = $8 thus reducing profit to 0