Question

2. The following table shows the revenue and cost information for a firm in a competitive market. $Price $Total Revenue $Marginal Revenue SMC Quantity 0 5 400 80 80 80 10 15 800 80 80 80 $Total Cost 100 600 1,075 1,525 1,925 2,525 3,525 1200 1600 100 95 90 80 120 200 80 80 20 25 30 80 80 2000 2400 80 80 a) Graph the total revenue and the total cost curves on a graph. Show that profit is maximized at the quantity you have determined in part c. b) Graph the marginal revenue and the MC curves using the midpoint method for MC. Do these curves intersect at the quantity you would expect? Explain.

Answer 1

Answer:

The table:

TR MR MC Profit Price 80 80 Quantity 0 5 TC 100 0 80 - 100 400 600 80 100 -200 80 10 800 1075 80 -275 95 90 15 1200 1525 80 80 80 20 1600 1925 80 80 -325 -325 -525 80 25 2000 2525 80 120 80 30 2400 3525 80 200 -1125

a. As we see in the table, optimum prodtion point is where price = MC = 80, at the output level 20. We also see that total cost is greater than total revenue at every level of output. The column of profit thus shows a negative balance at every level of output. However, when output = 20 (where price = MC),  we see that though output increases by 5 units, the negative balance of negative profit (or, loss) remains the same. So, this is the optimal point.

The graph shows that at output level of 20, the gap between the TR curve and TC curve is stagnant before it moves higher more than proportionate. So, output level of 20 is the loss minimizing level.

  

4000 3500 TC 3000 2500 TR 2000 1500 1000 500 0 0 2.5 5 7.5 10 12.5 15 17.5 20 22.5 25 27.5 30 32.5

b. The graph with midpoint method for MC:

  

220 200 180 MC 160 140 120 100 80 MR 60 40 20 0 2.5 7.5 12.5 17.5 22.5 27.5

The MR and MC curves meet at output level 17.5. This is different from what we see in the table, where MR = MC = 80 at output level of 20. This is because, in the table, the marginal cost of moving from output 15 to 20 is plotted against 20, while it is plotted between 15 and 20 on the graph.