Question

Profit Maximization for a Perfectly Competitive Firm

Goal: To determine how much candy George’s company should produce to make the maximum profit it can possibly make.

What you must know in order to successfully complete this assignment:

The definition of profit and how to calculate it.

The definitions of Total Cost (TC), Total Variable Costs (TVC) Total Fixed Costs (TFC), and Marginal Costs (MC) and how to calculate them.

The definitions of Total Revenue (TR) and Marginal Revenue (MR), how to calculate them, and how MR relates to product price in perfect competition.

The profit-maximizing rule, using MR and MC (as opposed to TC and TR)

The shutdown rule

Facts:

George Brown owns and operates a candy factory in a perfectly competitive industry.

George Brown wants to maximize his company’s profits.

George Brown’s candy factory has the following monthly costs:

Building rental:      $2,500 per month

Equipment rental: $3,200 per month

At the current levels of output other costs are as follows:

Number of Units	TVC	TC	AVC	ATC	MC
0	0
40,000	$16,000
80,000	29,000
120,000	45,000
160,000	65,000
200,000	90,000
240,000	120,000

Assignment

Complete the above table.

If the wholesale price of a package of candy is $.65, what quantity would you recommend George Brown produce?   Use the MR=MC profit-maximizing rule to determine your answer. Calculate the total profit or loss earned.

What should the volume of production (output) be if the candy sold for $.30 a package?

What should the volume of production (output) be if the candy sold for $.32 a package?  

Answer 1