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1 Surname Outp Pric Tot Total Tot Avera Avera Avera Margin Margin Total Prof ut e al variab al ge ge ge al cost it level per fixe le cost cost fixed unit d cost al reven variabl total revenu ue e cost e cost cost O 165 125 0 125 0 -125 1 165 125 113 238 125 113 238 113 165 165 -73 2 165 125 213 338 62.5 106.5 169 100 165 330 -8 3 165 125 300 425 41.7 100 141.7 87 165 495 70 4 165 125 375 500 31.3 93.8 125 75 165 660 160 5 165 125 463 588 25.0 92.6 117.6 88 165 825 237 6 165 125 563 688 20.8 93.8 114.7 100 165 990 302 7 165 125 675 800 17.9 96.4 114.3 112 165 1155 355 8 165 125 813 938 15.6 101.6 117.3 138 165 1320 382 9 165 125 975 110 13.9 108.3 122.2 162 165 1485 385 12.5 116.3 128.8 188 165 1650 362 0 10 165 125 1163 128 8 Q. MR=MC RULE MR=MC rule provides the profit maximizing output when marginal cost equals marginal revenue. This rule is applicable in all forms of market structure, however, in pure competition, another condition, P=MR=MC is placed. MC = MR; Marginal Cost is the increase in cost by producing one more unit of the good. Marginal Revenue is the change in total revenue as a result 2 Surname of changing the rate of sales by one unit. It is also the slope of Total Revenue. Profit = Total Revenue – Total Costs Therefore, profit maximization occurs at the biggest gap between the total revenue and the total cost. And, this is why MR = MC. The MC = MR rule. Market structure for the application of the rule It can be applied to hours of operation: stay open as long as the added revenue from the additional hour exceeds the cost of staying open another hour. It can be applied to advertising: increase the number of times you run your TV commercial as long as the added revenue from running it one more time outweighs the added cost of running it one more time. Q. Chart to show column 9 and 10; Answers are shown above in the table created and bolded. Q. Profit maximizing or loss for the firm The profit maximizing output for this firm is Q = 9 where MC is close to MR (162 vs 165). The economic profit at this level can be found by the difference of price over average total cost (165 122). Hence, total profit earned by this firm is 44*9 = $396. The break-even output for this firm (Initial level of TR=TC) 2 units. To determine the profit-maximizing level of output, firms use the MR=MC Rule: The firm maximizes profit or minimizes loss by producing the output where marginal revenue equals marginal cost. If total revenue and total cost figures are difficult to procure, this method may also 3 Surname be used. For each unit sold, marginal profit equals marginal revenue minus marginal cost. Then, if marginal revenue is greater than marginal cost, marginal profit is positive, and if marginal revenue is less than marginal cost, marginal profit is negative. When marginal revenue equals marginal cost, marginal profit is zero. Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero - or where marginal cost equals marginal revenue. Q. Why a firm is a price taker in pure competition A price taker is an investor whose buying or selling transactions are assumed to have no effect on the market. A firm that can alter its rate of production and sales without significantly affecting the market price of its product is also a price taker. Every firm in perfect competition is very small compared to the overall size of the market. Consumers do not distinguish between the products of one firm over another, so consumers will only purchase at the lowest price or the market price if there is only one price. With perfect competition, the competition means that all inefficient firms have been weeded out of the industry; only those which can cover their costs can survive. The competition means that the market price will allow for normal profits (to cover opportunity costs) but no economic profits. What this all means is that the individual firm cannot lower its prices to attract more customers: lower prices means that the firm cannot continue to cover its costs, and it would have to go out of business. The individual firm also cannot raise its prices, because it will lose its customers to the competition. With each firm selling identical products, there is no customer loyalty. The customer will migrate to the firms with the lower prices. The major reason for this is that the product it sells is identical to that of its competitors. Therefore, it cannot, for example, 4 Surname raise its price above that of its competitors and claim that its product is superior. If it raises its prices above those of its competitors, it will simply be unable to sell any goods. Since there are so many sellers and buyers selling and buying homogeneous product with no market power. They can sell all at the market price. That’s called a price taker. Work Cited Duffy, Michael. Estimated costs for production, storage, and transportation of switchgrass. Iowa State University, Department of Economics, 2007. Bils, Mark, and Yongsung Chang. "Understanding how price responds to costs and production." Carnegie-Rochester Conference Series on Public Policy. Vol. 52. North-Holland, 2000. Koopmanschap, Marc A., and Frans FH Rutten. "Indirect costs: the consequence of production loss or increased costs of production." Medical care (2016): DS59-DS68.
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