Consider the total cost and total revenue given in the following table: Output T

Question

Consider the total cost and total revenue given in the following table:

Output

Total Costs

Marginal   Costs

Total Revenue

Marginal 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

1.Calculate the marginal costs and marginal revenue.SHOW YOUR WORK

2.How much should the firm produce to maximize profits? Explain.

3.What is the price of the product? Explain.

Output

Total Costs

Marginal   Costs

Total Revenue

Marginal 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

Explanation / Answer

1) The marginal cost is equal to the cost of producing one more unit The marginal revenue is the revenue from one more unit Output Total costs Marginal costs Total revenue Marginal Revenue 0 8 0 1 9 1 8 8 2 10 1 16 8 3 11 1 24 8 4 13 2 32 8 5 19 6 40 8 6 27 8 48 8 7 37 10 56 8 To maximize profits, the firm should produce where marginal cost = marginal revenue Marginal cost = 8 = Marginal revenue = 8 when the units of output are 6. 2) The firm should produce 6 units of output. For a firm's supply under perfect competition, a firm will maximize profits when it produces at that level where Marginal cost = price MC = P For perfect competitors , Price = Marginal Revenue = Average Revenue 3) Price = Marginal revenue = $8 Price = $8

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