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Cost and Revenue Data

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For a firm in a pure competition, the price per unit will remain the same regardless of the output of the firm or the quantity produced, so the price will remain $165 per unit at all output levels. The total fixed cost will remain $125 at all output levels. The total cost (TC) = total fixed cost (TFC) + total variable cost (TVC).

The Average Fixed cost (AFC) = Total Fixed Cost/Output level, that is the total fixed cost divided by units produced. Similarly, the Average Variable Cost (AVC) = Total Variable cost (TVC)/Output level. The Average Total Cost can be calculated by either adding the AFC+AVC, or by dividing the Total cost by output level. So, ATC=AVC+AFC, or ATC=TC/Output level.

Marginal cost is equal to the cost of producing one more unit of the product or the increase in total cost as a result of production of one more unit.

Marginal cost (MC) = dTC/dQ, where dTC is the increase in total cost and dQ is the increase in quantity. Since dTC = d(FC+VC) and FC remains the same regardless of quantity, MC=dVC/dQ.

Similarly, marginal revenue (MR) is the additional revenue generated by selling one more unit of product. In this case, the firm is in a pure competitive environment and the price of each unit is same regardless of the quantity produced, so marginal revenue (MR) will always be equal to the price per unit. Total Revenue (TR) = MR * Output level = Price per unit * Qutput level

The MC=MR rule

According to the MC=MR rule, the firm’s profit is maximized when the marginal cost of production of the unit produced is equal to the marginal revenue made from selling that unit. This is also known as the Profit Maximization rule and applies to all kinds of firms, be it pure competitive firms, pure monopolies or monopolistic competitions. This is because for every firm, profit is maximized at the point where for the last unit produced, the cost of production is equal to the revenue generated on selling it. Till the time marginal cost is less than marginal revenue, the firm can benefit from increasing its output because it has something to gain by producing more. On the other hand, if marginal cost is more than marginal revenue, it means that the cost of producing the last unit is more than the revenue generated from it that means that the firm would be better off if it did not produce that unit. This holds true for all kinds of firms.

is this case, when a firm’s revenue exceeds the opportunity cost of the inputs, the firm is said to be making an economic profit. Here, for example, the rectangle between the red line (the marginal revenue or profit) and the orange line (the cost at the point where profit is maximized (MR=MC)) is the economic profit. This means that in this firm, the firm would lose less money is they produced even 1 unit than if thet shut down, so the best course of action would be to keep operating even at the lowest output level because the firm provides an economic profit.A “price-taker” by definition is a firm which can change its rate of production or its output level without affecting the market price of the product. This situation is true in the case of a firm in pure competition, as in a pure competition the products suppied by various firms are the same and one cannot distinguish between the output of different firms. Also, all firms have relatively small market share and cannot individually affect market prices. In a pure competition, the buyer is aware about the product and the prevailing prices and the firm is, therefore, bound to sell its product at the prevailing market price regardless of the quantity it produces or the cost it produces at.

The total revenue can easily be calculated by multiplying the price with output level, that is Total Revenue = Price per unit x Output.

Profit or loss can be calculated by subtracting total cost from the total revenue.

Profit or loss = Total Revenue – Total Cost

Break even point is defined as the point at which the firm’s revenues just cover its expenses. It can be calculated simply by looking at the Total revenue versus total cost figures in the tables. It can clearly be seen that at output level 2, the total cost was slightly more than the total revenue, but at output level 3, the total revenue exceeded the total cost. So the break-even would be achieved at output level 3 (or rather at slightly above output level 2).

In pure competition, the profit is maximized at the point where MC=MR. This condition is fulfilled at output level 9 or slightly below output level 9 in this case. At output level 9, the MC is $162, while the MR=$165, that is MC<MR, so profit is maximized at slightly less production that this. This is because at the 9th output level, the cost of producing the last unit is less than the revenue generated on selling it. But at output level 10, MC>MR, so the cost of producing this unit is more than the revenue generated on selling it.

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