Question

1. From the following data of a firm:

Output	Total Cost	Price
0	40	9
10	70	8
20	100	7
30	140	6
40	180	5
50	200	4

i) You are required to calculate at each level of output

1. The firm’s total revenue                                           

2. The firm’s marginal revenue and average revenue               

3. The firm’s fixed costs                                                                      

4. The firm’s marginal cost                                                                   

5. The firm’s average cost        

6. The firm’s profit levels         

7. State the type of market the firm is operating in?   

8. At what level of output will the firm aim to produce, state the reason

9. Explain the relationship between average revenue and price.

10. State the four (4) market structure                                                                                                                                         

Answer 1

Output	Total Cost	Price	Total Revenue	Marginal Revenue	Average Revenue	Fixed Cost	Variable Cost	Marginal Cost	Average Cost	Profit / Loss
0	40	9	0			40	0			-40
10	70	8	80	8	8	40	30	3	7.00	10
20	100	7	140	6	7	40	60	3	5.00	40
30	140	6	180	4	6	40	100	4	4.67	40
40	180	5	200	2	5	40	140	4	4.50	20
50	200	4	200	0	4	40	160	2	4.00	0

All revenues and cost are in dollars.

Part a

Total Revenue, TR = Price (P) * Quantity (Q)

Total Revenue at 20 units of output  = Price * Quantity = $7 * 20 = $140. Similarly for others have been calculated.

Part b

Marginal Revenue at 20 units of output = Change in Total Revenue / Change in Output = (140 - 80) / (20 - 10) = 60 / 10 = $6. Similarly for others have been calculated.

Part c

Fixed Cost = Total Cost - Variable Cost

At 0 units of output, Variable Cost = $0, Total Cost = $40, Fixed Cost = $40 - $0 = $40. Fixed Cost remains same at all levels of output. Fixed Cost at all levels of output = $40.

Part d

Marginal Cost at 20 units of Output = Change in Total Cost / Change in Output = (100 - 70) / (20 - 10) = 30 / 10 = $3. Similarly for others have been calculated.

Part e

Average Cost at 20 units of Output = Total Cost / Output = 100 / 20 = $5. Similarly for others have been calculated.

Part f

Profit / Loss at 20 units of Output = Total Revenue - Total Cost. = 140 - 100 = $40. Similarly for others have been calculated.

Part g

Firm is operating in Monopoly Market Structure. With a natural monopoly, Average costs keep falling because of continuous economies of scale. In this case, marginal cost is always below average cost over the whole range of possible output. In this case average cost is falling at all levels of output from $7 to $4. Also, marginal cost is below average cost at all levels of output.

Part h

The firm will produce at that level of output where MR = MC. When MR = MC, profit is maximized. At 30 units of output, MR = MC = $4. Firm will produce 30 units of output and maximum profit at 30 units of output will be $40

Part i

Average Revenue is the per unit revenue (price) received from the sale of one unit of a commodity. So, Average Revenue = Price ie AR = P. We know that TR = P * Q. Also, AR = TR / Q. So, AR = (P * Q) / Q = P. Hence proved AR = P.

Part j

Four types of market structure are:

Perfect Cometition. It is characterized by many firms, all firms produce identical products, firm is price taker and there are no barriers to entry.

Monopoly. In Monopoly, there is single firm selling unique product, having market power, firm is price maker and there are barriers to entry for other firms.

Monopolistic Competition. In case of Monopolistic Competition, there are many firms selling differentiated products, and firms are free to enter or exit the market.

Oligopoly. In case of Oligopoly, there are few firms selling identical or differentiated product and new firms have low ease of entry.