Question

Q	TC
0	$ 100
1	110
2	130
3	160
4	200
5	250
6	310
7	380
8	460
9	550
10	650
11	760

1. Say the firm is in a perfectly competitive market. If the current market (equilibrium) price is $ 60, at what output level will the firm as a profit maximizer produce at?
2. Say the market price rises to $ 80. At what output level (as a perfect competitor) will this produce at?
3. How much profit is the firm making at a price of $80? Based on this calculation, do you expect firms to enter or leave this market?
4. Say instead this firm is a monopoly. If the firm maximizes profit at an output level where marginal revenue equals $ 50, what output level will this be?

Answer 1

The perfectly competitive firm produces where the marginal cost equals the marginal revenue and the market price is also equal to the average and marginal revenue. .

In this graph we have to find out the marginal cost at every output produced, the marginal cost is the addition made to the total cost when an additional unit is produced.

.

Q	TC	MC
0	100	-
1	110	10
2	130	20
3	160	30
4	200	40
5	250	50
6	310	60
7	380	70
8	460	80
9	550	90
10	650	100
11	760	110

a). If the market price is $60 and that is also equal to the marginal revenue , the firm produces marginal cost equals the marginal revenue. The firm would produce 6 units.

b). If the price rises to $80 the firm would produce 8 units.

c). The profit is calculated by .

Here we divide the total cost by the quantity to get the average cost.

.

  .

  .

Profit .

  .

  .

  .

Profit equals $180.

The firm is earning a positive profit and the price is well above the average cost , so the firm should produce in this context. Due to positive profits in the market new firms will enter the market.

d).The monopolist also maximizes the profit where the marginal revenue equals the marginal cost ,so if this is a monopoly the firm would produce 5 units.