Unformatted Attachment Preview
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
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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
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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,
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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.