Question

Exhibit 9-10

Output (Q)	Total Revenue	Total Cost	Profit
0	$ 0	$0
1	100	50
2	200	110
3	300	180
4	400	260
5	500	360
6	600	480

1. Consider Exhibit 9-10 for a perfectly competitive firm that produces corn. Please answer questions 4 a through 4d.

4a. In the table titled “Profit” in Exhibit 9-10, for each level of output, please fill in the blanks by calculating profit.

4b. Create two new tables and label one table “Marginal Revenue” and the other table “Marginal cost.” For each level of output of producing corn, fill in each table by calculating marginal revenue and marginal cost. Please show the marginal revenue and marginal cost tables with the numbers you just calculated.

4c. Looking at the profit table and the marginal revenue and marginal cost calculations and tables you just calculated in question 4b, at what quantity of corn should the firm produce and what quantity shows where profits are maximized? Explain your answer.

4d. If we produce 2 units of output of corn, is Marginal Revenue greater than or less than marginal cost? What should the firm do to get to the profit maximizing level of output, produce more output or less output of corn? If we produce 6 units of output of corn, is Marginal Revenue greater than or less than marginal cost? What should the firm do to get to the profit maximizing level of output, produce more output or less output of corn? Explain your answer.

Answer 1

4 a. Firm's profit =Total Revenue - Total Cost of Production

Output(Q)	Total Revenue	Total Cost	Profit
0	$0	$0	$0
1	100	50	50
2	200	110	90
3	300	180	120
4	400	260	140
5	500	360	140
6	600	480	120

Table-1

_____________________________________________________________________

4 b. Marginal Revenue(MR) is the change in total revenue(TR) due to change in one unit of output(Q) , i.e.,

MR= TR/Q , where stands for 'change'

Output(Q)	Total Revenue	Total Cost	Profit	Marginal Revenue
0	$0	$0	$0	$0
1	100	50	50	100
2	200	110	90	100
3	300	180	120	100
4	400	260	140	100
5	500	360	140	100
6	600	480	120	100

Table-2

Marginal Cost(MC) is the change in total cost(TC) due to change in one additional unit of output, i.e.,

MC=TC/Q

Output(Q)	Total Revenue	Total Cost	Profit	Marginal Cost
0	$0	$0	$0	$0
1	100	50	50	50
2	200	110	90	60
3	300	180	120	70
4	400	260	140	80
5	500	360	140	100
6	600	480	120	120

Table-3

4 c. The firm under perfect competition will produce at the point, where its profit is maximized.

Profit(π) = Total revenue(TR) - Total cost(TC).........(1)

Now profit is maximized when there is no change in profit for an additional unit of output.

Differentiating equation (1) with respect to quantity (Q), we get,

π/Q = TR/Q - TC/Q

Now, π/Q =0 for profit maximization.

  TR/Q - TC/Q = 0

or, MR - MC =0

MR=MC

So, firm will produce that quantity of output, where MR = MC.

From Table-2 , and Table-3 , we see that at 5 units quantity of output , both MR and MC is $100. So the firm will produce 5 units quantity of corn

The firm attains the maximum profit at 5 units quantity of corn production. After that the profit is diminishing.

4 d.

At 2 units of corn output , marginal revenue(MR) is $100 , and marginal cost(MC) is $60. So MR is greater than MC. To get the profit maximizing level of output, firm should produce more units until MR equals MC. When MR becomes equal to MC, the firm's gets maximum profit.So firm should produce more of corns.

At 6 units of output, MR is $100 and MC is $120. So MR is less than MC. To reach the profit maximizing level of output, the firm should decrease the quantity of production until MR becomes equal to MC. So firm should produce less of corn.