Consider total cost and total revenue given in the table below: Quantity 0 1 2 3 4 5 6 7 total cost $8 $9 $10 $11
$13 $19 $27 $37 total revenue 0 8 16 24 32 40 48 56 a) Calculate profit for each quantity. How much should the firm produce to maximize profit? profit = total revenue - total cost profit -8 -1 6 13 19 21 21 19 Obviously the firm should produce an amount where the profit is 21 (highest number), yet since there are two possibilities we choose the one which is also the highest quantity. So the answer is: 6. b) Calculate marginal revenue and marginal cost for each quantity. Graph them. (hint: Put the points between whole numbers. For example, the marginal cost between 2 and 3 should be graphed at 2 1/2.) At what quantity do these curves cross? How does this relate to your answer to part (a)? I am too lazy to draw you a graph, as for this, I'd want it precise. When you look at MR and MC, you will notice that MR is a constant whereas MC changes. MR 8 8 8 8 8 8 8 MC 1 1 1 2 6 8 10 The curves cross when MR = MC. In this case, when the 6th unit is produced. This also happens to be the point of profit maximization. Thus we can say that profit is maximized when MR = MC. c) Can you tell whether this firm is in a competitive industry? If so, can you tell whether the industry is in a long-run equillibrium?
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