Part  1  Perfect  Competition  Analysis

Total  Output/hr

Total  Fixed  Costs  (TFC)

Total  Variable  Costs  (TVC)

Total  Costs  (TC)

Average  Fixed  Costs  (AFC)

Average  Variable  Costs  (AVC)

Average  Total  Costs  

(ATC)

Marginal  Costs  (MC)

Market  Price  Perfect  

Competition  (MPPC)

Total  Revenue  (TR)

Total  Profit  (TP)

Marginal  Revenue  (MR)

0 $10 $0 $10 #DIV/0! #DIV/0! #DIV/0! #DIV/0! $5 $0 ($10) $51 $10 $7 $17 $10 $7.00 $17 $7 $5 $5 ($12) $52 $10 $10 $20 $5 $5.00 $10 $3 $5 $10 ($10) $53 $10 $12 $22 $3 $4.00 $7 $2 $5 $15 ($7) $54 $10 $13 $23 $3 $3.25 $6 $1 $5 $20 ($3) $55 $10 $15 $25 $2 $3.00 $5 $2 $5 $25 $0 $56 $10 $18 $28 $2 $3.00 $5 $3 $5 $30 $2 $57 $10 $22 $32 $1 $3.14 $5 $4 $5 $35 $3 $58 $10 $27 $37 $1 $3.38 $5 $5 $5 $40 $3 $59 $10 $33 $43 $1 $3.67 $5 $6 $5 $45 $2 $510 $10 $40 $50 $1 $4.00 $5 $7 $5 $50 $0 $511 $10 $48 $58 $1 $4.36 $5 $8 $5 $55 ($3) $5

Maximum  Profit  at  Maximizing  Output

Marginal  Cost  (MC)  =  Marginal  Revenue  (MR)

Costs  of  Production  and  Profit  Maximization  Analysis                                                                                                                              Perfect  Competitive  Market  Structure

$0  $2  $4  $6  $8  $10  $12  $14  $16  $18  

1   2   3   4   5   6   7   8   9   10   11  

Prod

ucGo

n  Co

sts  

Output  

Average  Costs  of  ProducGon  

Marginal  Costs  (MC)  

Average  Total  Costs  (ATC)  

Average  Variable  Costs  (AVC)  

Average  Fixed  Costs  (AFC)  

$0    

$10    

$20    

$30    

$40    

$50    

$60    

$70    

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

Dollar  C

osts  

Output  

Total  Costs  of  ProducGon  

Total  Fixed  Costs  (TFC)  

Total  Variable  Costs  (TVC)  

Total  Costs  (TC)  

$0    

$10    

$20    

$30    

$40    

$50    

$60    

$70    

1   2   3   4   5   6   7   8   9   10   11  

Revenu

e  an

d  Co

sts  

Output  

Profit  MaximaizaGon  

Total  Revenue  (TR)  

Total  Costs  (TC)  

0.00  2.00  4.00  6.00  8.00  10.00  12.00  14.00  16.00  18.00  

1   2   3   4   5   6   7   8   9   10   11  

Price  an

d  Co

st  per  Unit  

Output  

Measuring  Total  Profits  

Average  Total  Costs  (ATC)  

Marginal  Costs  (MC)  

Marginal  Revenue  (MR)  

QuesGons:  Q1.  Explain  in  your  own  words  why  MC=MR  is  a  profit  maximizing  producGon  level?  

 A1-­‐  Marginal  Cost  (MC)  is  the  difference  in  the  amount  a  company  sepends  to  produce  one-­‐  unit  different  (+/-­‐)  of  the  product.  Marginal  Revenue  is  the  diffence  in  the  amount  of  money    they  make  from  this  one-­‐unit  difference  (+/-­‐).  If  the  company  spends  more  to  make  the    product  than  they  earn  by  selling  the  product  they  will  lose  money.  When  the  company    spends  less  money  they  make  less  product  and  therefore  they  sell  less  and  make  less  money.  

Q2.  Assume  prices  dropped  to  $4.25.  What  then  would  be  the  profit  maximizing  or  loss  minimizing  level  of  producGon?  

 A2-­‐  7  units  Q3.  Should  the  firm  conGnue  to  operate  at  this  point?  

 A3-­‐  Yes