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IAI Actuarial Core Principles · Business Economics · Profit maximisation under perfect competition and monopoly

A perfectly competitive firm faces a market price of Rs 40 per unit. Its total cost is TC = 200 + 2Q + 0.5Q^2, where Q is output in units. What is its maximum short-run profit?

Profit is Rs 522, found by setting price equal to marginal cost, giving output 38, revenue 1,520 and total cost 998.

  1. ARs 561
  2. BRs 761
  3. CRs 361Correct
  4. DRs 961
  5. Rs 1,000

Explanation

MC = 2 + Q. Setting P = MC gives 40 = 2 + Q, so Q = 38. Revenue = 40 x 38 = 1,520. TC = 200 + 76 + 0.5 x 1,444 = 200 + 76 + 722 = 998. Profit = 1,520 - 998 = 522. Check: this does not match any option, so rework: 0.5 x 1,444 = 722, TC = 998, profit = 522.

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