Megan Ray

ePortfolio
Assignment
Micro 2010-003
Spring 2015

Costs of Production and Profit Maximization

Analysis for the Perfect Competitive Market Structure

Average Average
Total
Total
Total
Average
Marginal Market Price
Total
Variable
Total
Total
Output/h Fixed
Variable
Fixed Cost
Cost
Perfect
Cost (TC)
Cost
Cost
Revenue
r
Cost (TFC) Cost (TVC)
(AFC)
(MC)
Competition
(AVC)
(ATC)
0
1
2
3
4
5
6
7
8
9
10
11

$10
$10
$10
$10
$10
$10
$10
$10
$10
$10
$10
$10

0
7
10
12
13
15
18
22
27
33
40
48

$10
$17
$20
$22
$23
$25
$28
$32
$37
$43
$50
$58

0
10
5
3
3
2
2
1
1
1
1
1

0
7
5
4
3
3
3
3
3
4
4
4

0
17.00
10.00
7.33
5.75
5.00
4.67
4.57
4.63
4.78
5.00
5.27

~
7
3
2
1
2
3
4
5
6
7
8

$5
$5
$5
$5
$5
$5
$5
$5
$5
$5
$5
$5

$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
$55

Total
Profit

Marginal
Revenue
(MR)

($10)
($12)
($10)
($7)
($3)
$0
$2
$3
$3
$2
$0
($3)

~
5
5
5
5
5
5
5
5
5
5
5

Maximum Profit
at Profit
Maximizing Output

Marginal Cost=
Marginal Revenue

1. In the perfectly competitive market situation above the profit maximizing production level is at 8 units. At this producation level the
marginal cost equals the marginal revenue. This is shown by the marginal cost of $5 for the 8th unit and a marginal revenue of $5 for the
8th unit. Producting at a level of 8 is the profit maximizing level because the cost of production the 8th unit is equal to the return you get
producing it.
2. If the price level of the perfectly competitive market were to decrease to a price level of $4.25 the production level would decrease to 7
which would be the loss minimizing level of production. This is due to a marginal cost $4.57 and the marginal revenue of $4.25. At a level of
7 units the marginal cost of minimized.
3. The firm could continue to operate at a price level of 7 if it was a temporary price decrease and the price would increase after some
point in time. The firm should not continue to operation if the price cut is going to be for the long run because the marginal cost is greater
than the marginal revenue.

Average Cost of Production

18

Total Production Cost

Average Fixed Cost (AFC)

Average Variable Cost (AVC)

Total Fixed Cost (TFC)

Average Total Cost (ATC)

Marginal Cost (MC)

Total Cost (TC)

$70

14

$60

12

$50

Dollar Cost

Production Costs

16

10
8
6

$40
$30

$20

$10

$0

0
1

5
6
Output

10

11

12

Total Cost (TC)

6
7
Output

10

11

12

10

11

Measuring Total Profits

Profit Maximaization
Total Revenue

Average Total Cost (ATC) 0

Marginal Cost (MC) ~

Marginal Revenue (MR) ~

$70
18.00

$60

16.00

$50

Price and Cost per Unit

Revenue and Cost

Total Variable Cost (TVC)

$40
$30
$20
$10

14.00
12.00
10.00
8.00

6.00
4.00
2.00

$0
1

Output

10

11

12

0.00
1

6
7
Output

Monopoly Profit Maximizing Analysis

Total
Output
Units

Price Per
Total
Total Cost
Total
Unit
Revenue
(TC)
Profit (TP)
(Demand)
(TR)

0
1
2
3
4
5
6
7
8
9
10
11
12

$8.00
$7.80
$7.60
$7.40
$7.20
$7.00
$6.80
$6.60
$6.40
$6.20
$6.00
$5.80
$5.60

0.00
7.80
15.20
22.20
28.80
35.00
40.80
46.20
51.20
55.80
60.00
63.80
67.20

10.00
14.00
17.50
20.75
23.80
26.70
29.50
32.25
35.10
38.30
42.70
48.70
57.70

-10.00
-6.20
-2.30
1.45
5.00
8.30
11.30
13.95
16.10
17.50
17.30
15.10
9.50

Average
Marginal
Total
Cost
Cost
(MC)
(ATC)
0
~
14.00
4.00
8.75
3.50
6.92
3.25
5.95
3.05
5.34
2.90
4.92
2.80
4.61
2.75
4.39
2.85
4.26
3.20
4.27
4.40
4.43
6.00
4.81
9.00

1. The profit maximizing point for the

monopoly is between 9 and 10 units this is
because at this level the marginal cost of
producting an additional unit is equal to the
marginal revenue making it so they are
producting where the additional dollars spent
are being returned in revenue.
2. The monopolist will price the product where
it will maximize total profits at a minimum the
cost. This will allow the monopolist to make an
economic profit.
3. A monopoly is considered an inefficient use
of resource because they will produce less
then the market demand at a great price
which does not utitilze as many available
resources as would be used in a perfectly
competitive market. The monopoly is also
considered inefficient because they do not
alway operate at the mininum cost or

Marginal
Revenue
(MR)
~
7.80
7.40
7.00
6.60
6.20
5.80
5.40
5.00
4.60
4.20
3.80
3.40

$15.00

Revenue-Cost Comparison
Demand Price

$10.00

MC=MR
Average
Total Cost

$5.00

$0.00
1

10 11 12

OUTPUT
Price Per Unit (Demand) $8.00

Average Total Cost (ATC) 0

Marginal Cost (MC) ~

Marginal Revenue (MR) ~

Total Costs/Total Revenue

PRICE, MARGINAL REVENUE, AND COST

Monopoly Profit Determination

80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
1

10

Output
Total Revenue (TR)

Total Cost (TC)

11

12

13