Question

A perfectly competitive firm sells pencils for $3.00 per box with marginal revenues of .60 per box. The following is its production level and the marginal costs associated with each level:

• 1 box, MC of .10; ATC = .50
• 20 boxes, MC of .05; ATC = .30
• 30 boxes, MC of .15; ATC = .45
• 40 boxes, MC of .58; ATC = .50
• 50 boxes, MC of .68; ATC = .68

My answer =The firm is operating in perfectly competitive industry. The Marginal Revenue = $ 0.60 per box thus, the firm maximizes profit at the point where, MR = MC.
The firm will maximize profit at MC = $ 0.58
40 boxes, MC = $ 0.58 and ATC = $ 0.50

* What is the firms profit maximization level and what is profit at that level? Also, what factors might contribute to rising costs in the short and long run?

Answer 1

Profit maximization of output is equilibrium where firm its maximize profit at certain level of output which reached at when MR = MC so in this case the MR = $0.6 is given and MC = $0.58 which is approximately equivalent to MR at output of 40 boxes. so production of 40 boxes is profit maximization level for firm.

Profit at Level = Total Revenue - Total cost

Total Revenue = Price of pencil per box X number of boxes = $3 X 40 = $120

Total Cost = Nmber of boxes X ATC = 40 X $0.5 = $20

Profit at Level = 120 - 20 = $100

Factor that contribute rising cost in short - run : In the short run the capital is assume to fixed in copetetive market so change in variable factor will be cause for rising costs. Increase in factor price can lead the rising cost like wages, Increase in Price of Raw material which use in production, Increase in transportation prices, Increase in electricity Power prices etc.

Factor that contribute rising cost in Long - run : In Long run there is no fixed factor of production so the cost of production may rise due to inrease in price of capital and use of capital, change in Technology, rate of utilisation of fixed capital, Policy changes by government etc.