5. The following diagram shows the market demand curve of Apple Cinnamon Cheerio

Question

5. The following diagram shows the market demand curve of Apple Cinnamon Cheerios, the isopcofit curves of the producer firm, and the firm's profit function curve. Based on the graph, which of the following statements are correct? Select correct answer a. The highest profit that the firm can make is $60,000. b. The profit-maximizing choice for the firm is not where the highest attainable lsoprofit curve is tangent to the demand curve. The profiti-maximizing choice for the fim is where its marginal rate of substitution between the price charged and the quantity produced is equal to its marginal rate of transformation. The profit-maximizing choice for the firm is not the peak of its profit function curve. c. d. 10 Isoprofit curve: $60,000 Isoprofit curve: $34,000o lsoprofit curve: $23,000 Isoprofit curve: $10,000 Isoprofit curve: $o Demand curve 0 8,000 16,000 24 ,000 32,000 40,000 48,000 S6,000 64.000 72,000 80,000 50,000 1 40,000 30,000- 20,0001 10,000 0,000 40,000 80,000 20,000 Quantity Q: pounds of Cheerios

Explanation / Answer

5) Ans. C. The statement C is correct. Because The equilibrium will take place where the slope demand curve and iso-profit curve are equal. The slope of demand curve says the marginal rate of substitution between price charged and quantity produced. Because in demand curve we are taking price of a good and quantity demand of that good in vertical axis and horizontal axis. On the other hand slope of iso profit curve says the rate of transformation. It tells about how profit can change with different price and quantity. So it is a rate of transformation.

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