ECON1131 Chapter Notes - Chapter 12: Average Variable Cost, Perfect Competition, Marginal Revenue

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31 Mar 2017

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All participants are price-takers (no one can control the price) Standardized goods: commodity, products of different producers regarded as the same good. Total cost = fixed cost + variable cost. Profit = total revenue - total cost. To determine the level of output needed to maximize profit the firm uses profit- Profit-maximizing principle of marginal analysis: produce at a quantity where. Mc = mr in this case so . Optimal output rule = mr = mc. Marginal revenue: additional revenue a firm gets from the sale of one additional unit of output. Mr = change total revenue / change quantity. For a perfectly competitive firm mr = p at any level of output. Optimal output rule for perfectly competitive markets: P = mc doesn"t always mean profit. Profit positive when tr > tc or. A producer knows whether or not its business will be profitable by comparing market price to his own atc.

Related Questions

PROFIT MAXIMIZATION

Reminders:

Q: Quantity, TC: Total Costs, VC: Variable Costs, MC: Marginal Costs, MR: Marginal Revenue, TR: Total Revenue

1. Suppose the market for DVD movies is perfectly competitive. The industry price for the movies is $24, and a typical firm has the following total cost data:

Q	TC	VC	MC	MR	TR	Net Profit
0	10
1	33
2	53
3	70
4	90
5	114
6	143

a. Calculate the TR, MR, and MC for each level of output.

b. What condition must be met for the firm to maximize profits? What is the profit maximizing level of output and price for this firm? How much profit would be made?

2. Now suppose that some firms have been able to differentiate their DVDs, and the market has become monopolistically competitive. A typical firm now has the following demand schedule and total cost data:

Q	P	TC	VC	MC	MR	TR	Net Profit
0	40	8
1	35	20
2	30	28
3	25	40
4	20	56
5	15	76
6	10	100

a. Calculate the TR, MR, and MC for each level of output.

b. What condition must be met for the firm to maximize profits? What is the profit maximizing level of output and price for this firm? How much profit would be made?

(a) Complete the following cost and revenue schedules for a perfectly competitive firm:

Instructions: Enter your responses as a whole number. Indicate a negative response with a (-) negative sign.

Quantity	Price = MR	Total Revenue	Total Cost	Profit	Marginal Cost
0	$60	$	$50	$	------
1	$60	$	$70	$	$
2	$60	$	$110	$	$
3	$60	$	$170	$	$
4	$60	$	$240	$	$
5	$60	$	$320	$	$

(b) Graph MC and price.

Instructions: Use the tool provided to draw the marginal cost curve (MC). This line should have 5 points.

(c) What rate of output maximizes profit?

Instructions: Enter your responses as a whole number.

units

(d) What is MC at that rate of output?

$

QUESTION 22

For a perfectly competitive firm, profit maximization (or loss minimization) occurs at the level of output at which

	a.	MR = MC.
	b.	MR = AVC.
	c.	P = ATC.
	d.	MR = ATC.

4 points

QUESTION 23

If MR > MC, then

	a.	profits are being maximized.
	b.	the firm is producing too much of the good to be maximizing profits.
	c.	the firm can increase its profits (or minimize its losses) by increasing output.
	d.	the firm must be incurring losses.

4 points

QUESTION 24

If firms are earning zero economic profits, they must be producing at an output level at which

	a.	price minus marginal cost.
	b.	total revenue equals total costs, in other words, normal profits.
	c.	price equals average variable cost.
	d.	marginal revenue equals marginal cost.
	e.	none of the above

4 points

QUESTION 25

In the theory of perfect competition,

	a.	the market demand curve is horizontal.
	b.	the single firm faces a horizontal demand curve.
	c.	the single firm faces a downward-sloping demand curve.
	d.	the market demand curve is downward sloping.
	e.	b and d

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ECON1131 Chapter Notes - Chapter 12: Average Variable Cost, Perfect Competition, Marginal Revenue

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