Question

A perfectly competitive firm faces a market-determined price of $25 for its product.
(1) (2) (3) (4) (5) (6) (7)
Quantity
Total cost
Average total cost
Marginal cost
Marginal revenue
Profit margin
0 1000 100 2000 200 3300 300 4800 400 7000 500 9600
a. The firm’s total costs are given in the schedule above. Fill in columns 3 and 4 for average total cost and marginal cost. b. Fill in columns 5 and 6 for marginal revenue and profit margin. c. How much output should the competitive firm produce? Explain.

Answer 1

Quantity	Total cost	Average total cost	Marginal cost	Marginal revenue	Profit margin
0	1000	-	-	-	-
100	2000	20	10	25	5
200	3300	16.5	13	25	8.5
300	4800	16	15	25	9
400	7000	17.5	22	25	7.5
500	9600	19.2	26	25	5.8

ATC=TC/Q

MC=∆TC/∆Q

Profit margin= MR-MC

Firm should produce that output level where profit is maximum.

Profit maximising condition is MC=MR.

So, When Q=400, profit is equal to 7.5*400=$3000 which is maximum.

At any output level beyond this ,MC is greater than MR which is undesirable.