Costs of Production and Profit Maximization Analysis for the Perfect Competitive Market Structure

Total Average Average Average

Total Total Fixed Variable Total Fixed Variable Total Marginal Market Price Marginal
Output/h Costs Costs Costs Costs Costs Costs Costs Perfect Total Total Revenue
r (TFC) (TVC) (TC) (AFC) (AVC) (ATC) (MC) Competition Revenue Profit (MR)
0 $ 10 $ - $ 10 $ - $ - $ - 0 $5 $0 ($10) 0
1 $ 10 $ 7 $ 17 $ 10.00 $ 7.00 $ 17.00 7 $5 $5 ($12) $5 Marginal Cost = Marginal Revenue
2 $ 10 ### $ 20 $ 5.00 $ 5.00 $ 10.00 3 $5 $10 ($10) $5
3 $ 10 $ 12 $ 22 $ 3.33 $ 4.00 $ 7.33 2 $5 $15 ($7) $5
4 $ 10 $ 13 $ 23 $ 2.50 $ 3.25 $ 5.75 1 $5 $20 ($3) $5
5 $ 10 $ 15 $ 25 $ 2.00 $ 3.00 $ 5.00 2 $5 $25 $0 $5 Maximum Profit at Profit Maximizing Output
6 $ 10 $ 18 $ 28 $ 1.67 $ 3.00 $ 4.67 3 $5 $30 $2 $5
7 $ 10 $ 22 $ 32 $ 1.43 $ 3.14 $ 4.57 4 $5 $35 $3 $5 1. Explain in your own words why MC=MR is a profit
8 $ 10 $ 27 $ 37 $ 1.25 $ 3.38 $ 4.63 5 $5 $40 $3 $5 maximizing production level?
9 $ 10 $ 33 $ 43 $ 1.11 $ 3.67 $ 4.78 6 $5 $45 $2 $5
10 $ 10 $ 40 $ 50 $ 1.00 $ 4.00 $ 5.00 7 $5 $50 $0 $5 Marginal Cost equals Marginal Revenue because it is at the
11 $ 10 $ 48 $ 58 $ 0.91 $ 4.36 $ 5.27 8 $5 $55 ($3) $5 maximizing production level, because at this level your price and
output show where you will have the greatest profit.
Average Costs of Production Profit Maxim ization 2. Assume prices dropped to $4.25. What then would be the
$20.00 $70
profit maximizing or loss minimizing level of production?
$60
$15.00 If you were to drop the price to $4.25 then you would be working at a
$50 loss of minimizing level.
Production Cost $10.00 $40
Price & Cost per Unit $30 3. Should the firm continue to operate at this point?
$5.00
$20
$- $10 The firm would not make any profit because you would be working
1 2 3 4 5 6 7 8 9 10 11 below your Average Total Costs, so you would be paying more then
$-
Output 1 2 3 4 5 6 7 8 9 10 11 12 what you make.
OutPut
Average Fixed Costs (AFC) Average Variable Costs (AVC)
Average Total Costs (ATC) Marginal Costs (MC) Total Costs (TC) Total Revenue

Total Costs of Production Measuring Total Profits

$70 $20.00
$60
$50 $15.00
$40
Price & Cost Per Uint $10.00
Costs $30
$20 $5.00
$10
$- $-
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11

OUtput Output

Total Fixed Costs (TFC) Total Variable Costs (TVC) Average Total Costs (ATC) Marginal Costs (MC)
Total Costs (TC) Marginal Revenue (MR)
 Monopoly Profit Maximizing Analysis
Average 1. Explain in your own words why MC=MR is a profit
Total Price Per Total Total Total Total Marginal Marginal maximizing production level for the Monopoly.
Output Unit Revenue Costs Profit Costs Costs Revenue
Units (Demand) (TR) (TC) (TP) (ATC) (MC) (MR) Marginal cost equals Margainal Revenue because at this level you
0 $8.00 0.00 10.00 -10.00 -- -- -- want your revenue higher then your costs.
1 $7.80 7.80 14.00 -6.20 14.00 4.00 7.80
2. Explain how the monoploist determines where to price
2 $7.60 15.20 17.50 -2.30 8.75 3.50 7.40
his product.
3 $7.40 22.20 20.75 1.45 6.92 3.25 7.00
4 $7.20 28.80 23.80 5.00 5.95 3.05 6.60 Monopolies are price makers, they can set their price above
5 $7.00 35.00 26.70 8.30 5.34 2.90 6.20 Marginal Costs because they do not have the worry about losing
6 $6.80 40.80 29.50 11.30 4.92 2.80 5.80 customers because they are their own competition.
7 $6.60 46.20 32.25 13.95 4.61 2.75 5.40
8 $6.40 51.20 35.10 16.10 4.39 2.85 5.00 3. A monopoly is considered an inefficient use of resources
9 $6.20 55.80 38.30 17.50 4.26 3.20 4.60 for what two reasons?
10 $6.00 60.00 42.70 17.30 4.27 4.40 4.20
The two reason are Allocative inefficiency and higher prices and
11 $5.80 63.80 48.70 15.10 4.43 6.00 3.80 lower output. They are the price makers so they are not running
12 $5.60 67.20 57.70 9.50 4.81 9.00 3.40 off of what the market is, so prices will be higher then both their
Marginal Costs and Average Total Costs.
Monopoly Profit Determination
Price Per Unit (Demand) $8.00 Average Total Costs (ATC) --
Marginal Costs (MC) -- Marginal Revenue (MR) --

$16.00

$14.00

$12.00
Demand Price
$10.00

$8.00 Marginal Cost = Marginal Revenue

Price, Marginal Revenue, & Costs
Average Total Costs
$6.00
Monopoly Profit
$4.00

$2.00

$0.00
1 2 3 4 5 6 7 8 9 10 11 12

Output

Revenue-C ost C omparison

Total Revenue (TR) Total Costs (TC)

80.00

70.00

60.00

50.00

Total Costs & Total Revenue 40.00

30.00

20.00

10.00

0.00
1 2 3 4 5 6 7 8 9 10 11 12 13

Output