Question

This is a firm in a perfectly competitive market. The selling price is $5.

Fill in the table below and enter the answers to the questions down below:

1-How many units should be produced?

2- What will be the profit per unit?

3- What will be the total profit?

4- If the price were to drop to $4 how many units should be produced?

5- What will be the total profits?

6- If the price falls to $1, how many units should be produced?

7- At what price will you break even?

8- At what price should the company close down?

9- At what price will you be minimizing losses?

10- There are 2 ways of calculating the change in total profits. List and explain what information you would use.

Quantity	TC	Price of	TR	ATC	AVC	MC	MR	MR-MC	Profit	change in
		good								profit
0	10	5
1	15	5
2	18	5
3	20	5
4	21	5
5	23	5
6	26	5
7	30	5
8	35	5
9	41	5
10	48	5
11	56	5

Answer 1

Quantity	Total cost	marginal cost ( MC)	Price. ( MR)	TR.	ATC.	AVC	MR-MC	profit
0	10	-	5	0	-	-	-	-10
1	15	5	5	5	15	5	0	-10
2	18	3	5	10	9	4	2	-8
3	20	2	5	15	6.67	3.3	3	-5
4	21	1	5	20	5.25	2.75	4	-1
5	23	2	5	25	4.6	2.6	3	2
6	26	3	5	30	4.3	2.67	2	4
7	30	4	5	35	4.29	2.86	1	5
8	35	5	5	40	4.375	3.125	0	5
9	41	6	5	45	4.56	3.44	-1	4
10	48	7	5	50	4.8	3.8	-2	2
11	56	8	5	55	5.09	4.18	-3	-1

A perfectly competitive firm sells all its units of output at the same price. As all the units of output are sold at the same price, the marginal revenue earned from the sale of an additional unit of output is same as that of price and is constant. Hence, for a perfectly competitive firm, P=MR. As price = $5, MR=$5

1). A perfectly competitive firm produces that level of output where marginal cost is equal to marginal revenue ( MC=MR). This is the profit maximising output. From the above table we can see that MC=MR at an output of 1 units and 8 units. But the firm would not produce 1 unit because as we can see from the table that as output is increased from 1 unit, Marginal cost is less than Marginal revenue. Hence,if the firm would stop it's production here , then it would lose on some profits. Hence, it would continue to produce more until MC= MR. Hence, the firm would produce 8 units of output.

2) .From the table we can see that at output of 8 units, average total cost ( per unit cost) is $4.375 and price of each unit is $5. So, profit per unit is-

Profit per unit= price ( Marginal revenue) - average total cost

Profit per unit= $5 - $4.375

Profit per unit= $0.625

Hence, profit per unit is $0.625

3). From the above table we can see that at the profit maximising output of 8 units, total cost is $35.

Total revenue= price x quantity

Total revenue= $5 x 8

Total revenue= $40

Total profit = total revenue - total cost

total profits= $40 - $35

Total profits= $5

Hence, the firm's total profits at the profit maximising output is $5

4). If the price will drop to $4, then MR=$4. A perfectly competitive firm produces that level of output where marginal cost is equal to marginal revenue ( MC=MR). If price is $4, then MC=MR at output of 7 units. Hence, the firm will produce 7 units if price drops to $4. This is the profit maximising output.