The total cost of a firm at different output levels of 1 unit, 2 units, 3 units, 4 units, 5 units, 6 units, and 7 units of output sold is Rs. 5, Rs. 15, Rs. 22, Rs. 27, Rs. 31, Rs. 38 and Rs. 49. Price of commodity is Rs. 10. What is the profit maximizing level of output?
Answer & explanation
Correct answer: option 3
The correct answer is Option 3: 6 units
Profit is TR minus TC
TR at output levels of 1 unit, 2 units, 3 units, 4 units, 5 units, 6 units, 7 units is Rs. 10, Rs 20, Rs 30, Rs 40, Rs 50, Rs 60, Rs 70 respectively and
TC is given as Rs. 5, Rs. 15, Rs. 22, Rs.27, Rs. 31, Rs. 38 and Rs. 49 respectively.
So profit at output levels 1, 2, 3, 4, 5, 6, 7 is Rs. 5, Rs. 5, Rs. 8, Rs. 13, Rs. 19, Rs. 22, and Rs. 21 respectively.
- The highest profit is Rs. 22, which occurs at 6 units of output.
- At 7 units, profit declines to Rs. 21, meaning producing more reduces profit.