Question

In: Economics

Suppose that a firm in a competitive market faces the following revenues and costs:


Table 14-9
Suppose that a firm in a competitive market faces the following revenues and costs:

Quantity

Total Revenue

Total Cost

0

$0

$10

1

$9

$14

2

$18

$19

3

$27

$25

4

$36

$32

5

$45

$40

6

$54

$49

7

$63

$59

8

$72

$70

9

$81

$82






Refer to Table 14-9. If the firm produces 4 units of output,



a)marginal revenue is less than marginal cost.

b)marginal cost is $4.

c)the firm is maximizing profit.

d)total revenue is greater than variable cost.

Solutions

Expert Solution

The profits of a perfectly competitive firm is maximised when P = MC.

P = AR = TR/Q, Profit = TR - TC, MC = dTC/dQ, MR = dTR/dQ

Using the above formula we get the following table.

Quantity Total Revenue Total Cost Marginal Revenue Marginal Cost Average Revenue
0 0 10
1 9 14 9 4 9
2 18 19 9 5 9
3 27 25 9 6 9
4 36 32 9 7 9
5 45 40 9 8 9
6 54 49 9 9 9
7 63 59 9 10 9
8 72 70 9 11 9
9 81 82 9 12 9

Here P = AR + MC at Q = 6. So option c) is incorrect.

At Q = 4, MR > MC, so option a) incorrect.

At Q = 4, MC = 7. so option b) incorrect.

Therefore, d) is the correct option.


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