Question

Complete the following cost and revenue schedule:

Price	Quantity Demanded	Total Revenue	Marginal Revenue	Total Cost	Marginal Cost	Average Total Cost
20	0			8
18	1			14
16	2			22
14	3			32
12	4			44
10	5			58
8	6			74
6	7			92
4	8			112
2	9			147

a. Graph the demand, MR, and MC curves.

b. At what rate of output are profits maximized within this range?

c. What are the values of MR and MC at the profit-maximizing rate of output?

d. What are total profits at that output rate?

e. If a competitive industry confronted the same demand and costs, how much output is produced in the short run?

f. What would happen to long-run price in perfect competition?

*Please explain in detail how you arrived at the answer.

Answer 1

MR = Change in TR / Change in Quantity

MC = Change in TC / Change in Quantity

a)

b) Equilibrium is attained where MR = MC

MR = MC = 10 at 3 units of output.

So, profit maximizing output is 3 units.

c) At profit maximizing output, MR and MC both are 10.

d) Total profit = TR - TC = 42 - 32 = 10

e) Under competitive model, equilibrium is attained where P = MC.

P = MC at 4 units of output.

So, 4 units of output is the profit maximizing output in short run.

f) In the long run, firms earn zero profit in the market as there is free entry and exit of firms in the industry. If in short run, firms are earning positive profit then new firms enter in the long run and reduces profit to zero.