Subpart (a):
Profit maximization.
Subpart (a):
Explanation of Solution
Table – 1 represents the value of quantity, total cost, and total revenue.
Table – 1
Quantity | Total cost | Total revenue |
0 | 8 | 0 |
1 | 9 | 8 |
2 | 10 | 16 |
3 | 11 | 24 |
4 | 13 | 32 |
5 | 19 | 40 |
6 | 27 | 48 |
7 | 37 | 56 |
The profit can be calculated by using the following formula:
Substitute the respective value in equation (1) and calculate the profit.
The profit is –$8.
Table – 2 shows the value of the profit that is obtained, by using equation (1).
Table – 2
Quantity | Total cost | Total revenue | Profit |
0 | 8 | 0 | –8 |
1 | 9 | 8 | –1 |
2 | 10 | 16 | 6 |
3 | 11 | 24 | 13 |
4 | 13 | 32 | 19 |
5 | 19 | 40 | 21 |
6 | 27 | 48 | 21 |
7 | 37 | 56 | 19 |
From the above table, the firm can maximize profit when they produce five or six units of output.
Concept introduction:
Perfect competitive firm:
Marginal Revenue (MR): Marginal revenue refers to the additional revenue earned due to increasing one more unit of output.
Marginal Cost (MC): The marginal cost refers to the amount of an additional cost incurred in the process of increasing one more unit of output.
Subpart (b):
Profit maximization.
Subpart (b):
Explanation of Solution
The marginal revenue can be calculated by using the following formula:
Substitute the respective value in equation (2) and calculate marginal revenue.
The marginal revenue is $8.
Table – 3 shows the value of the marginal revenue that obtained by using equation (2).
Table – 3
Quantity | Total cost | Total revenue | Marginal revenue | Profit |
0 | 8 | 0 | – | –8 |
1 | 9 | 8 | 8 | –1 |
2 | 10 | 16 | 8 | 6 |
3 | 11 | 24 | 8 | 13 |
4 | 13 | 32 | 8 | 19 |
5 | 19 | 40 | 8 | 21 |
6 | 27 | 48 | 8 | 21 |
7 | 37 | 56 | 8 | 19 |
The marginal cost can be calculated by using the following formula:
Substitute the respective value in equation (3) and calculate the marginal cost.
The marginal cost is $8.
Table – 4 shows the value of the marginal cost that is obtained by using equation (3).
Table – 4
Quantity | Total cost | Marginal cost | Total revenue | Marginal revenue | Profit |
0 | 8 | – | 0 | – | –8 |
1 | 9 | 1 | 8 | 8 | –1 |
2 | 10 | 1 | 16 | 8 | 6 |
3 | 11 | 1 | 24 | 8 | 13 |
4 | 13 | 2 | 32 | 8 | 19 |
5 | 19 | 6 | 40 | 8 | 21 |
6 | 27 | 8 | 48 | 8 | 21 |
7 | 37 | 10 | 56 | 8 | 19 |
Figure – 1 shows the marginal revenue curve and marginal cost curve.
Figure – 1
From the above figure, the x axis shows the quantity of output and the y axis shows the price, that is, revenue and cost. From the above figure, the intersecting point shows the point the firm’s maximizing profit when they produce five or six units of output.
Concept introduction:
Perfect competitive firm: Perfect competition refers to the market structure featuring more number of sellers and buyers in the market, where the firm can sell homogenous products.
Marginal Revenue (MR): Marginal revenue refers to the additional revenue earned due to increasing one more unit of output.
Marginal Cost (MC): The marginal cost refers to the amount of an additional cost incurred in the process of increasing one more unit of output.
Subpart (c):
Profit in the long run.
Subpart (c):
Explanation of Solution
Since the marginal revenue is the same as each level of the quantity, the firm is in a competitive industry. The firm is earning an economic profit. Generally, firms in the long run earn a normal profit. Thus, the firm is not in the long run equilibrium.
Concept introduction:
Long run: Thelong run refers to the time, which changes the production variable to adjust to the market situation.
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Chapter 14 Solutions
Study Guide for Mankiw's Principles of Microeconomics, 7th
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