Question

Total Revenue Marginal Revenue 1) For the following firm in a competitive market, COSTS REVENUES Quantity Total Marginal Quantity Produced Cost Cost Demanded Price SO $80 $50 $80 $102 $80 $157 $80 $217 SSO $285 $80 $365 $80 $462 $80 8 $582 IS $80 a) Fill the column for marginal cost, total revenue and marginal revenue. b) What is interesting about the numbers you find for marginal revenue. c) Based on profit maximization rule that you learned in Chapter 14 for competitive firms, what is the profit maximizing output? Explain how you found your answer. 2) For the following firm in a competitive market, a) What is the profit maximizing quantity (approximately) when the market price is 8? Show it on the graph. b) Show the profit when at price of $8 on the graph. c) What will this firm do if the price falls to $5 in short run and long run? 1 Price MC ATC - AVC 1 2 3 4 5 6 7 8 9 10 11 Quantity

Answer 1

1. a.

Costs			Revenues
Quantity Produced	Total Cost ($)	Marginal Cost ($)	Quantity Demanded	Price ($)	Total Revenue ($)	Marginal Revenue ($)
0	0	-	0	80	0	-
1	50	50	1	80	80	80
2	102	52	2	80	160	80
3	157	55	3	80	240	80
4	217	60	4	80	320	80
5	285	68	5	80	400	80
6	365	80	6	80	480	80
7	462	97	7	80	560	80
8	582	120	8	80	640	80

Formulae used:

Marginal cost of N^th unit = Total Cost of N units - Total Cost of (N-1) units

Total Revenue = Quantity Demanded x Price

Marginal Revenue from N^th unit = Total Revenue from N units - Total Revenue from (N-1) units

b. It can be observed that the marginal revenue is constant at all the given quantities demanded.

Also, Marginal revenue = Price

c. The profit-maximising output for a competitive firm occurs when Marginal Cost = Marginal Revenue = Price

From the above table, we observe that MC = Price = $80 when the output(i.e., quantity produced) = 6 units