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

Total Total Average Average Average

Fixed Variable Total Fixed Variable Total Marginal Market Price Marginal
Total Costs Costs Costs Costs Costs Costs Costs Perfect Total Total Revenue
Output/hr (TFC) (TVC) (TC) (AFC) (AVC) (ATC) (MC) Competition Revenue Profit (MR)
0 $12.00 $0.00 $12.00 $ - $ - $0.00 $ 6.00 $6.00 $0.00 ($12.00) $0.00
1 $12.00 $6.00 $18.00 $ 12.00 $ 6.00 $18.00 $ 3.00 $6.00 $6.00 ($12.00) $6.00
2 $12.00 $9.00 $21.00 $ 6.00 $ 4.50 $10.50 $ 2.00 $6.00 $12.00 ($9.00) $6.00
3 $12.00 $11.00 $23.00 $ 4.00 $ 3.67 $7.67 $ 1.00 $6.00 $18.00 ($5.00) $6.00
4 $12.00 $12.00 $24.00 $ 3.00 $ 3.00 $6.00 $ 2.00 $6.00 $24.00 $0.00 $6.00
5 $12.00 $14.00 $26.00 $ 2.40 $ 2.80 $5.20 $ 3.00 $6.00 $30.00 $4.00 $6.00
6 $12.00 $17.00 $29.00 $ 2.00 $ 2.83 $4.83 $ 4.00 $6.00 $36.00 $7.00 $6.00
7 $12.00 $21.00 $33.00 $ 1.71 $ 3.00 $4.71 $ 5.00 $6.00 $42.00 $9.00 $6.00
8 $12.00 $26.00 $38.00 $ 1.50 $ 3.25 $4.75 $ 6.00 $6.00 $48.00 $10.00 $6.00
9 $12.00 $32.00 $44.00 $ 1.33 $ 3.56 $4.89 $ 7.00 $6.00 $54.00 $10.00 $6.00
10 $12.00 $39.00 $51.00 $ 1.20 $ 3.90 $5.10 $ 8.00 $6.00 $60.00 $9.00 $6.00
11 $12.00 $47.00 $59.00 $ 1.09 $ 4.27 $5.36 $ - $6.00 $66.00 $7.00 $6.00
Part 3 ANALYSIS:
a) Insert a (Text Box) and answer the following questions: (Analysis)
1. Explain in your own words why MC=MR is the optimum level of output. Because total revenues excedes total cost by
greatest amount. The company wants to make the best use of resources, that is, produce and sell the most at the lowest possible cost. This
entails obtaining the highest possible profit.
2. Assume prices dropped to $5.35. What then would be the profit maximizing or loss minimizing level of production ? If the
marginal revenue exceeds the marginal cost, the company must increase production.
If the marginal revenue is less than the marginal cost, production must be reduced.
In perfect competition: marginal revenue (IM) = price (P), because the company is a price acceptor. Therefore, the company in perfect
competition expands production to the point where the marginal cost is equal to the price. In the same way, the marginal income is equal to
the average income that is the same as that of the demand curve
3. Explain how a perfectly competitive firm determines its optimum level of output. Perfect competition arises when there
are many firms selling a homogeneous good to many buyers with perfect information. Under perfect competition, a firm is a price taker of
its good since none of the firms can individually influence the price of the good to be purchased or sold. As the objective of each perfectly
competitive firm, they choose each of their output levels to maximize their profits. The key goal for a perfectly competitive firm in
maximizing its profits is to calculate the optimal level of output at which its Marginal Cost (MC) = Market Price (P).