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4. Suppose you are the manager of a watch making firm operating in a competitive market. Your cost of production is given by C200+2q, where q is the level of output and C is total cost. (The marginal cost of production is 4q; the fixed cost is $200.) (a Ifthe price of watches is$100, how many watches should you produce to maximize profit? (b) What will the profit level be? (c) At what minimum price will the firm produce a positive output?

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Answer #1

a) profit is maximized where P = MC

100 = 4q

Watches produced = 25

b) profit = P x q - C

Profit = 2500 - 200 - 2 x 625 = $ 1050

c) output would be produced at P >= min AVC

AVC = 2q

P min = 0

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