The Figure Given Below Represents a Firm in a Market

Multiple Choice

The figure given below represents a firm in a market characterized by many buyers and one seller.MC is the initial marginal cost of the seller.MC' denotes the marginal cost inclusive of the $1 transaction cost.On the other hand, buyers incur a transaction cost worth $2 represented by the vertical distance between D and D'.MR and MR' represent the marginal revenue curve corresponding to the demand curves D and D' respectively.


-Refer to Figure.Suppose the seller incurs an additional cost of $1 per unit of output to reduce the transaction costs of the buyers to zero.Determine the profit maximizing price and output when the buyers incur zero transaction cost.

A) Output = 2.5 units and price = $8.25
B) Output = 2.5 units and price = $6.5
C) Output = 3 units and price = $9
D) Output = 3 units and price = $6.5