The next six questions will deal with a perfectly competitive firm, with no impl

Question

The next six questions will deal with a perfectly competitive firm, with no implicit costs, described by the following table. Notice that the table is partial and doesn't start at 0, and also that it doesn't go in increments of one at a time (so marginal values are approximations rather than exact). The firm sells its output for P = $1. See below:

Calculate values of A, B, C, D, E

What will the firm's profits (economic and accounting are the same) be when it produces its profit-maximizing quantity?

Quantity Total
Revenue Marginal
Revenue Total
Cost Marginal
Cost Profits 200 $90 $0.80 E 300 $180 D 400 A $280 500 B $390 600 C $1.20

Explanation / Answer

Value of A = $400                  (Revenue = Q*P = 400*1 = $400)

Value of B = $1                      (MR = (500 – 400)/(500 – 400) = $1)

Value of C = $510                 (TC = 1.2*(600-500) +390 = $510)

Value of D = $.9                     (MC = (180-90)/(300-200) = $.9)

Value of E = $110                (Profit = revenue – cost = 200-90 = $110)

For perfectly competitive firm, profit maximization output is achieved when:

P = MR = MC

Above condition is met when 400 quantity is produced at which P = MR = MC = $1 and profit is $120.

Quantity Total Marginal Total Marginal Profits ($) Revenue ($) Revenue ($) Cost ($) Cost ($) 200 200 90 $0.80 110 300 300 1 180 0.9 120 400 400 1 280 1 120 500 500 1 390 1.1 110 600 600 1 510 1.2 90

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