Consider the total cost and total revenue schedules of two firms: Yellow Bricks
ID: 1114658 • Letter: C
Question
Consider the total cost and total revenue schedules of two firms:
Yellow Bricks Co. Oompa Loompa, Inc
Output TC TR TC TR
1 100 135 50 160
2 200 260 125 300
3 300 375 225 420
4 400 480 350 520
5 500 575 500 600
6 600 660 675 660
7 700 735 875 700
8 800 800 1100 720
a) For each firm, and each level of output, calculate marginal cost, average cost, marginal revenue, price, profit, and marginal profit.
b) What is the profit-maximizing output in each case? Show that three criteria are equivalent: marginal cost equals marginal revenue, maximum profit, and marginal profit equals zero.
c) For each firm, describe the relationship between marginal cost and average cost, and between marginal revenue and price. How do you explain those relationships?
Explanation / Answer
a.
For Yellow Bricks Co --
For Oompa Loompa, Inc ----
b. In case of Yellow Bricks Co --
(i) By MR = MC, its 4 units
(ii) By maximum profit also, it is 4 units.
(iii) By marginal profit = 0, we choose 4 units since its the closest to our specified rule.
In case of Oompa Loompa Inc . --
(i) By MR = MC, its 3 units
(ii) By maximum profit also, it is 3 units.
(iii) By marginal profit = 0, we choose 3 units since its the closest to our specified rule.
(c) For Yellow Bricks Co, MC = AC = 100 (i.e. it remains constant across the given output levels). As total cost levels change by a constant level, this is expected.
MR < P for all output levels but more importantly, the decline in MR level is much higher than P level. MR curve is much steeper than P curve.
For Oompa Loompa, Inc, the MC > AC across specified output levels. This is because the firm is in an expansion phase where in the rising cost contribute to rising average costs. Here also, MR < P whose interpretation is similar to Yellow Bricks Co.
Q TC TR Profit MC MR AC = TC/Q MP = MR - MC P = TR/Q 1 100 135 35 100 135 2 200 260 60 100 125 100 25 130 3 300 375 75 100 115 100 15 125 4 400 480 80 100 105 100 5 120 5 500 575 75 100 95 100 -5 115 6 600 660 60 100 85 100 -15 110 7 700 735 35 100 75 100 -25 105 8 800 800 0 100 65 100 -35 100