Question

Answer the following questions based on the firm's cost table above (or see attached): (1) What kind of market structure does that firm belong to? (2) Which unit production can maximize the profit for the firm? Why? Calculate the maximum profit (what is the maximum profit for this firm?)

Answer 1

1. It is a perfectly competitive market. It can be seen from the table that the marginal revenue is same at all quantity. This otherwise means that the price or average revenue is also same for all quantity. In case of perfect competition, the firms are price takers. The price is fixed by the industry. All the firms has to sell at that price only. So the firm faces a straight horizontal demand curve where AR=MR.

2. Profit maximising quantity is 80 units.
The profit maximising condition is MR=MC. This is the first order condition for determining profit maximising output. At quantity 80 units the marginal revenue equals to marginal cost.
At this point profit will be $56. Profit is the difference between Total Revenue and Total Cost.

Profit = $320 - $264 = $56