Question
I just need ,c,d,e,f, answered in full.
: Consider the following table of costs for the Winsome Widget Factory, which operates in a perfectly competitive market. The market price faced by this firm is $6.00 per widget.
a. Fill in the formula for AFC, AVC, ATC, MC, TR, MR, and Total Profit at the top of the column in the gray section within the table.
b. Fill in the missing values for TFC, TVC, AFC, AVC, ATC, MC, TR, MR, and Total Profit in the blue sections of the table.
Winsome Widget Factory
Output Total Fixed Cost Total Variable Cost Total Cost Average Fixed Cost Average Variable Cost Average Total Cost Marginal Cost Total Revenue Marginal Revenue Total Profit
0 $100
10 150
20 180
30 200
40 240
50 300
60 375
70 475
80 600
90 750
100 1,000
c. Determine the profit maximizing level of output. Explain how you arrived at that conclusion.
d. What is the total profit at the profit maximizing level of output? How does that compare to profit at other levels of output?
e. What is the lowest price that Winsome Widgets will accept and continue to produce in the short run? Explain.
f. Is Winsome Widgets in long-run equilibrium? Explain.
Explanation / Answer
c What is the lowest price that Winsome Widgets will accept and continue to produce in the short run? Explain. ans An alternative perspective relies on the relationship that, for each unit sold, marginal profit (Mp) equals marginal revenue (MR) minus marginal cost (MC). Then, if marginal revenue is greater than marginal cost at some level of output, marginal profit is positive and thus a greater quantity should be produced, and if marginal revenue is less than marginal cost, marginal profit is negative and a lesser quantity should be produced. At the output level at which marginal revenue equals marginal cost, marginal profit is zero and this quantity is the one that maximizes profit.[1] Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero - or where marginal cost equals marginal revenue - and where lower or higher output levels give lower profit levels.[1] In calculus terms, the correct intersection of MC and MR will occur when:[1] rac{dMR}{dQ} < rac{dMC}{dQ} The intersection of MR and MC is shown in the next diagram as point A. If the industry is perfectly competitive (as is assumed in the diagram), the firm faces a demand curve (D) that is identical to its marginal revenue curve (MR), and this is a horizontal line at a price determined by industry supply and demand. Average total costs are represented by curve ATC. Total economic profit are represented by the area of the rectangle PABC. The optimum quantity (Q) is the same as the optimum quantity in the first diagram. If the firm is operating in a non-competitive market, changes would have to be made to the diagrams. For example, the marginal revenue curve would have a negative gradient, due to the overall market demand curve. In a non-competitive environment, more complicated profit maximization solutions involve the use of game theory. Case in which maximizing revenue is equivalent In some cases a firm's demand and cost conditions are such that marginal profits are greater than zero for all levels of production up to a certain maximum.[2] In this case marginal profit plunges to zero immediately after that maximum is reached; hence the Mp = 0 rule implies that output should be produced at the maximum level, which also happens to be the level that maximizes revenue.[2] In other words the profit maximizing quantity and price can be determined by setting marginal revenue equal to zero, which occurs at the maximal level of output. Marginal revenue equals zero when the total revenue curve has reached its maximum value. An example would be a scheduled airline flight. The marginal costs of flying one more passenger on the flight are negligible until all the seats are filled. The airline would maximize profit by filling all the seats. The airline would determine the Pi_max conditions by maximizing revenues. Changes in total costs and profit maximization A firm maximizes profit by operating where marginal revenue equal marginal costs. A change in fixed costs has no effect on the profit maximizing output or price.[3] The firm merely treats short term fixed costs as sunk costs and continues to operate as before.[4] This can be confirmed graphically. Using the diagram illustrating the total cost–total revenue perspective, the firm maximizes profit at the point where the slopes of the total cost line and total revenue line are equal.[2] An increase in fixed cost would cause the total cost curve to shift up by the amount of the change.[2] There would be no effect on the total revenue curve or the shape of the total cost curve. Consequently, the profit maximizing point would remain the same. This point can also be illustrated using the diagram for the marginal revenue–marginal cost perspective. A change in fixed cost would have no effect on the position or shape of these curves.[2] Markup pricing In addition to using methods to determine a firm's optimal level of output, a firm that is not perfectly competitive can equivalently set price to maximize profit (since setting price along a given demand curve involves picking a preferred point on that curve, which is equivalent to picking a preferred quantity to produce and sell). The profit maximization conditions can be expressed in a "more easily applicable" form or rule of thumb than the above perspectives use.[5] The first step is to rewrite the expression for marginal revenue as MR = ?TR/?Q =(P?Q+Q?P)/?Q=P+Q?P/?Q, where P and Q refer to the midpoints between the old and new values of price and quantity respectively.[5] The marginal revenue from an "incremental unit of quantity" has two parts: first, the revenue the firm gains from selling the additional units or P?Q. The additional units are called the marginal units.[6] Producing one extra unit and selling it at price P brings in revenue of P. Moreover, one must consider "the revenue the firm loses on the units it could have sold at the higher price"[6]—that is, if the price of all units had not been pulled down by the effort to sell more units. These units that have lost revenue are called the infra-marginal units.[6] That is, selling the extra unit results in a small drop in price which reduces the revenue for all units sold by the amount Q(?P/?Q). Thus MR = P + Q(?P/?Q) = P +P (Q/P)((?P/?Q) = P + P/(PED), where PED is the price elasticity of demand characterizing the demand curve of the firms' customers, which is negative. Then setting MC = MR gives MC = P + P/PED so (P - MC)/P = - 1/PED and P = MC/[1 + (1/PED)]. Thus the optimal markup rule is: (P - MC)/P = 1/ (- PED)