Profit Maximization for a Perfectly Competitive Firm Goal: To determine how much
ID: 1166795 • Letter: P
Question
Profit Maximization for a Perfectly Competitive Firm
Goal: To determine how much candy George’s company should produce to make the maximum profit it can possibly make.
What you must know in order to successfully complete this assignment:
The definition of profit and how to calculate it.
The definitions of Total Cost (TC), Total Variable Costs (TVC) Total Fixed Costs (TFC), and Marginal Costs (MC) and how to calculate them.
The definitions of Total Revenue (TR) and Marginal Revenue (MR), how to calculate them, and how MR relates to product price in perfect competition.
The profit-maximizing rule, using MR and MC (as opposed to TC and TR)
The shutdown rule
Facts:
George Brown owns and operates a candy factory in a perfectly competitive industry.
George Brown wants to maximize his company’s profits.
George Brown’s candy factory has the following monthly costs:
Building rental: $2,500 per month
Equipment rental: $3,200 per month
At the current levels of output other costs are as follows:
Number of Units
TVC
TC
AVC
ATC
MC
0
0
40,000
$16,000
80,000
29,000
120,000
45,000
160,000
65,000
200,000
90,000
240,000
120,000
Assignment
Complete the above table. (5 points)
If the wholesale price of a package of candy is $.65, what quantity would you recommend George Brown produce? Use the MR=MC profit-maximizing rule to determine your answer. Calculate the total profit or loss earned. (5 points)
What should the volume of production (output) be if the candy sold for $.30 a package? (5 points)
What should the volume of production (output) be if the candy sold for $.32 a package? (5 points)
Number of Units
TVC
TC
AVC
ATC
MC
0
0
40,000
$16,000
80,000
29,000
120,000
45,000
160,000
65,000
200,000
90,000
240,000
120,000
2. If the wholesale price of a package of candy is $.65, what quantity would you determine your answer. Calculate the total profit or loss earned. (5 points) 3. What should the volume of production (output) be if the candy sold for $.30 a Profit Maximization for a Perfectly Competitive Firm recommend George Brown produce? Use the MR=MC profit-maximizing rule to Goal: To determine how much candy George's company should produce to make the maximum profit it can possibly make What you must know in order to successfully complete this assignment: . The definition of profit and how to calculate it. . The definitions of Total Cost (TC), Total Variable Costs (TVC) Total Fixed Costs package? (5 points) (TFC), and Marginal Costs (MC) and how to calculate them. The definitions of Total Revenue (TR) and Marginal Revenue (MR), how to calculate them, and how MR relates to product price in perfect competition 4. What should the volume of production (output) be if the candy sold for $.32 a . package? (5 points) The profit-maximizing rule, using MR and MC (as opposed to TC and TR) The shutdown rule Facts: .George Brown owns and operates a candy factory in a perfectly competitive industry . George Brown wants to maximize his company's profits .George Brown's candy factory has the following monthly costs 1. Building rentl: $2,500 per month 2. Equipment rental $3,200 per month At the curent levels of output other costs are as follows TC AVC ATC MC Number of TVC Units $16,000 29,000 45,000 65,000 80,000 120,000 160,000 200,000 90,000 240,000 Assignment 1. Complete the above table. (5 points)Explanation / Answer
Number of units TVC $ TC $ ATC $ (TC/number of units AVC $ (TVC/number of units MC $ FC $ 0 0 5700 0.00 - 5700 0.40 40000 16000 21700 0.54 0.40 5700 0.33 80000 29000 34700 0.43 0.36 5700 0.40 120000 45000 50700 0.42 0.38 5700 0.50 160000 65000 70700 0.44 0.41 5700 0.63 200000 90000 95700 0.48 0.45 5700 0.75 240000 120000 125700 0.52 0.50 5700 Fixed cost Building rental + equipment rental=$ 2500 +$3200= $5700 TC= TFC+TVC Marginal cost is the extra or additional cost of producing 1 extra unit of output. MC= Change in total cost/Change in output ($21700-$5700)/(40000-0)=16000/40000=0.4 2. If price of candy =$0.65 Profit maximization under perfect competition = MR equals MC The firm should produce 200000 units, because beyond this production MC will be greater than MR and the firm will incur a loss. 3. The firm should shutdown as the price is less than AVC. 4. The firm should shutdown as the price is less than AVC.
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