Question

For a firm A which is operating under Pure Competition; Under Total Revenue-Total Cost Approach;

Total Revenue Total Cost Approach
Total Product (Output) (Q)	Total Fixed Cost (TFC)	Total Variable Cost (TVC)	Total Cost (TC)	Average Total Cost ATC	Marginal Cost MC	Total Revenue (TR)	Profit (+) or Loss (-)
0	40	0	40			0
1	40	20	60			40
2	40	30	70			80
3	40	55	95			120
4	40	70	110			160
5	40	140	180			200
6	40	210	250			240
7	40	310	350			280

1. Fill in the table above by calculating the Total fixed cost Average total cost, Marginal cost total revenue and the profit/loss for each level of output. Assume the price of the product P= $40.                                                                                                   
2. Indicate the level of Output where Profit is Maximized?                                        

                       

3. What is the Maximum Profit for Firm A?                                                            

Answer 1

(a)

Total Output	Total Fixed Cost	Total Variable Cost	Total Cost	Average Total Cost	Marginal Cost	Total Revenue	Total Profit (Total Revenue - Total Cost
0	40	0	40	-	-	0	-40
1	40	20	60	60	20	40	-20
2	40	30	70	35	30	80	10
3	40	55	95	31.67	25	120	25
4	40	70	110	25.5	15	160	50
5	40	140	180	36	70	200	20
6	40	210	250	41.67	70	240	-10
7	40	310	350	50	100	280	-70

(b) Profit Maximizing output is 4 units,

At this output, Total revenue = 160 and Total cost = 110. Therefore, Profit = 50 which is highest level of profit among all output levels.

Intuitively, When Average Total Cost is at its minimum, that output is profit maximizing quantity, same is the case here. Minimum Average Total Cost is 25.5 where profit is 50.

(c) Maximum Profit = 50

FORMULA USED:

1. Total Revenue = Price per unit*Output

2. Marginal Cost = Change in Total Cost

3. Average Total Cost = Total Cost/output

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