To Maximize Its Profit, a Producer Should Set a Price

question 262

Multiple Choice

To maximize its profit, a producer should set a price (and produce that related output) where:

• A) marginal cost is just less than or equal to marginal revenue.
• B) marginal cost is at its minimum.
• C) price is as high as possible.
• D) total revenue equals total cost.
• E) marginal revenue is zero.

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Definitions:

Price Elasticity

The measure of how much the quantity demanded of a good responds to a change in its price, with elasticity greater than one indicating a high sensitivity to price changes.

Supply Elasticity

A measure of how much the quantity supplied of a good changes in response to a change in price.

Equilibrium Price

The equilibrium price where the supply of goods meets consumer demand.

Horizontal Supply Curve

Represents a market situation where the supply of a good is perfectly elastic, indicating the supplier is willing to sell any quantity at a fixed price.