Question

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The price of jeans in a perfectly competitive market is $15. Costs are as follows:  

Quantity      0     1      2      3     4     5     6     7     8     9     10

Total Cost 10    17    26    37    50   65    82 101 122 145   170

What is the profit maximizing rate of output for the firm? What is the profit maximization rule?

At what price should the firm shut down? What is the shutdown rule?

Answer 1

The formula used to calculate the above table :

1). Marginal Revenue = Price (Perfect Competition)

2). Total Revenue = Price * Quantity

3). Marginal cost is the difference between the total cost at the current output and previous output. In a similar manner, we can also calculate marginal revenue.

4). Total Cost = Total Fixed Cost + Total Variable Cost

5). Average Variable Cost = Total Variable Cost/ Output

Under a perfectly competitive market structure firm earns a maximum profit when P(MR) = MC.

In the above table, we can see that at output 5 marginal revenue(price) = MC.

A firm in perfect competition shutdowns, when the price per product is below the average variable cost because it means at this output firm, is not able to cover even its operating cost.

Here, in the table, we can see that the Minimum average variable cost is 7 at output 1, so if the price is lower than 7 then the firm should shut down.