Question

Table of Q Output, TC, MC, Qd, P and MR

Output	Total cost	Marginal cost	Quantity demanded	Price	Marginal revenue
0	$75		0	$180
1	120	$_____	1	165	$_____
2	135	_____	2	150	_____
3	165	_____	3	135	_____
4	210	_____	4	120	_____
5	270	_____	5	105	_____
6	345	_____	6	90	_____
7	435	_____	7	75	_____
8	540	_____	8	60	_____
9	660	_____	9	45	_____
10	795	_____	10	30	_____

(a)   At what output level and at what price will the firm produce in the short run? What will be the total profit?

(b)   What will happen to demand, price, and profit in the long run?

Answer 1

The marginal cost is the change in total cost for the change in an additional unit of output production.

The marginal revenue is the change in total revenue for an additional unit of output sold.

Output	Total Cost	Marginal Cost	Quantity Demanded	Price	Total Revenue	Marginal Revenue
0	$75	-	0	$180	-	-
1	$120	$45	1	$165	$165	$165
2	$135	$15	2	$150	$300	$135
3	$165	$30	3	$135	$405	$105
4	$210	$45	4	$120	$480	$75
5	$270	$60	5	$105	$525	$45
6	$345	$75	6	$90	$540	$15
7	$435	$90	7	$75	$525	- $15
8	$540	$105	8	$60	$480	-$45
9	$660	$120	9	$45	$405	-$75
10	$795	$135	10	$30	$300	-$105

(a) A firm produces the profit-maximizing level of output at which, the marginal revenue equals the marginal cost of production. In the short-run, a firm will increase its producttion till the marginal cost is less than the marginal revenue. If the marginal cost exceeds marginal revenue, the firm will stop its production. From the table, we see that, till the 4 units of output, the marginal cost is less than the marginal revenue. When the output is 5 units, the marginal cost exceeds the marginal revenue.Thus, in the short-run, the firm will produce the output level 4 units.

The price,the firm will charge for this output level is $120

Total Profit = Total Revenue - Total Cost

From the table we see that, at 4 units of output, the total revenue is $480 ,and the total cost is $210.

Total Profit = $480 - $210

Or, Total Profit = $270

The firm's total profit will be $270.

Thus, in the short-run, the firm will produce 4 units of output at price of $120, and the total profit the firm earns is $270.

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(b) The firm is earning profit in the short-run. Now, if the firm produces in monopolistic competition, then attracted by its profit, the other firms with similar but differentiated products will enter the market over the long-run. As a result, over the time, the availability of substitute products will increase in the market. With the increase in the number of firms and substitute products,in the long-run, the supply will increase in the market. Again with the increase in competition,in the long-run, the firm will face a fall in demand for its product. Thus, the demand curve for its product will shift leftward, and the price of its product will come down. The price of its product will decrease until the firm earns zero economic profit, i.e., the price equals the average total cost of production.

So, in the long-run, we can conclude that the firm's demand for its product and the price of its product will decrease, and the firm will earn zero or normal economic profit.

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