Question

2.)       For a price-searcher, assume the demand curve is Q = 20 - P.

a.)        Construct a four-column table of P and Q with P ranging from 20 to 0. Calculate TR and MR and add them to your table.

b.)       Graph D and MR. (Plot points—with $ on the vertical axis and Q on the horizontal axis.)

c.)        Why is P > MR (after the first unit)

3.)       Using the same price-searcher, assume the firm faces the following total costs (TC) with Q ranging from 0 to 10: $10, 12, 13, 15, 18, 22, 27, 33, 40, 48, and 57.

1.)        Add TC, FC, VC and MC (marginal cost), and profits to the above table.

2.) Determine profit-maximizing equilibrium output. What's happening with MR and MC at that point?

Answer 1

2) Q = 20 - P

a) Total Revenue = P * Q

MR = TR from current unit - TR from previous unit

P	Q	TR	MR
0	20	0	-
1	19	19	19
2	18	36	17
3	17	51	15
4	16	64	13
5	15	75	11
6	14	84	9
7	13	91	7
8	12	96	5
9	11	99	3
10	10	100	1
11	9	99	-1
12	8	96	-3
13	7	91	-5
14	6	84	-7
15	5	75	-9
16	4	64	-11
17	3	51	-13
18	2	36	-15
19	1	19	-17
20	0	0	-19

b)

c) P > MR because producers tends to sell additional goods at lower selling price than the previous selling price which tends to reduce marginal revenue.

3)

1) Profit = TR - TC

Q	TC	FC	VC	MC	P	TR	MR	Profit
0	10	10	0	-	20	0	-	-
1	12	10	2	2	19	19	19	7
2	13	10	3	1	18	36	17	23
3	15	10	5	2	17	51	15	36
4	18	10	8	3	16	64	13	46
5	22	10	12	4	15	75	11	53
6	27	10	17	5	14	84	9	57
7	33	10	23	6	13	91	7	58
8	40	10	30	7	12	96	5	56
9	48	10	38	8	11	99	3	51
10	57	10	47	9	10	100	1	43

2) Profit is maximum when MR = MC or they are close to each other. They are close when 7 units are produced where profit is $58. MC is rising and MR is falling at that point of output.