Suppose you build and sell houses in a perfectly competitive market, and the mar

Question

Suppose you build and sell houses in a perfectly competitive market, and the market price is $120,000. Your total costs are shown in the table below. (Note the cost figures reflect increasing marginal costs, which would occur, for example, if the cheapest land and labor were bought first.) Fill in the values for the Marginal Cost, Total Revenue and Total Profit Columns. Then answer these questions: What is the profit maximizing level of output? Should you continue to produce as long as your total revenue is greater than your total cost? Explain why or why not. Use the term "marginal" in your explanation. Quantity of Houses Total Cost Marginal Cost Iotal Revenue Iotal Profit $100,000 $215,000 $345,000

Explanation / Answer

Profit maximizing level of output = 2 units ( quantity of houses)

Because, at this level of output, marginal cost (MC) is less than the price or marginal revenue that is $120000. Afterwards, the MC exceeds the price or MR. then, production of 2 units of houses is the profit maximizing output.

No, firm should focus upon the marginal revenue and marginal cost rather total revenue and total cost. Firm should continue production as long as marginal revenue is greater or equal to MC. It will maximize the profit. Following the concept of total cost and total profit, will decrease the profit level as shown in the above table when 3 units of home is produced.

Quantity of houses Total cost ($) Marginal cost ($) Total revenue ($) Total profit ($) 1 100000 120000 20000 2 215000 115000 240000 25000 3 345000 130000 360000 15000

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