Question

Consider total cost and total revenue given in the following table:
Quantity 0 1 2 3 4 5 6 7
Total cost $8 9 10 11 13 19 27 37
Total revenue $0 8 16 24 32 40 48 56
a. Calculate profit for each quantity. How much should the firm produce to maximize profit?
b. Calculate marginal revenue and marginal cost for each quantity. Graph them. (Hint: Put the points between whole numbers. For example, the marginal cost between 2 and 3 should be graphed at 2½.) At what quantity do these curves cross? How does this relate to your answer to part (a)?
c. Can you tell whether this firm is in a competitive industry? If so, can you tell whether the industry is in a long-run equilibrium?

Answer 1

a)

Quantity	Total Cost ($)	Total Revenue($)	Profi = TR-TC	MR = ΔTR / ΔQ	MC = ΔTC / ΔQ	ATC
0	8	0	-8
1	9	8	-1	8	1	9.00
2	10	16	6	8	1	5.00
3	11	24	13	8	1	3.67
4	13	32	19	8	2	3.25
5	19	40	21	8	6	3.80
6	27	48	21	8	8	4.50
7	37	56	19	8	10	5.29

Profit maximizing output level is 6 units.

b)

Both MC and MR curve crosses at the level of output when 6 unit is produced. At this output level profit is maximum.

c) Yes, this firm is in a competitive firm industry as P=MC=MR at the profit maximum level and it is charging the market price thus acting as a price taker. No, the industry is not in a long run equilibrium as P ATC because in long run in a competitive firm industry firm has a zero economic profit as P = ATC.