Costs of Production and Profit Maximization Analysis for the

Perfect Competitive Market Structure

Total Average Average Average

Total Total Fixed Total Cost Fixed Marginal
Variable Costs Variable Total Costs
Output/hr Costs (TFC) Costs (TVC) (TC) Costs (MC)
(AFC) Costs (AVC) (ATC)

0 $10 $0 10
1 $10 7 $17 $10 7.00 17.00 $7
2 $10 10 $20 $5 5.00 10.00 $3
3 $10 12 $22 $3 4.00 7.33 $2
4 $10 13 $23 $3 3.25 5.75 $1
5 $10 15 $25 $2 3.00 5.00 $2
6 $10 18 $28 $2 3.00 4.67 $3
7 $10 22 $32 $1 3.14 4.57 $4
8 $10 27 $37 $1 3.38 4.63 $5
9 $10 33 $43 $1 3.67 4.78 $6
10 $10 40 $50 $1 4.00 5.00 $7
11 $10 48 $58 $1 4.36 5.27 $8

Average Costs of Production

18

16
Production Costs

14

12

10

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

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

Output

Profit Maximization
70

60

50
Revenue and Costs

40

30

20

10

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

Output

Measuring Total Profits

$18

$16

$14

$12
Price and Cost per Unit

$10

$8

$6

$4
 $12

Price and Cost per Unit

$10

$8

$6

$4

$2

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

Output
ximization Analysis for the
arket Structure
1. Explain in your own words why MC=MR is a profit maxim
At this level of output, the firm is producing the most p
Market Price Marginal produce more they will be losing profit, while if they make l
Total Total Profit of money they can.
Perfect Revenue
Revenue (TR) (TP)
Competition (MR)
2. Assume prices dropped to $4.25. What then would be th
level of production?
$5 $0 -$10 If prices dropped to $4.25 the loss minimizing level of p
$5 $5 -$12 $5
3. Should the firm continue to operate at this point?
$5 $10 -$10 $5 No, they would not be making a profit.
$5 $15 -$7 $5
$5 $20 -$3 $5
$5 $25 $0 $5
$5 $30 $2 $5
$5 $35 $3 $5 Maximum Profit at Profit Maximizi
$5 $40 $3 $5
$5 $45 $2 $5 Marginal Costs = Marginal Re
$5 $50 $0 $5
$5 $55 -$3 $5

uction

Average Fixed Costs (AFC)

Average Variable Costs (AVC)
Average Total Costs (ATC)
Marginal Costs (MC)

9 10 11
 9 10 11

on

Total Cost (TC)

Total Revenue (TR)

9 10 11 12

ofits

Average Total Costs (ATC)

Marginal Costs (MC)
Marginal Revenue (MR)
 Average Total Costs (ATC)
Marginal Costs (MC)
Marginal Revenue (MR)

9 10 11
 words why MC=MR is a profit maximizing production level?
put, the firm is producing the most product while still making a profit. If they
l be losing profit, while if they make less they are not making the most amount

ped to $4.25. What then would be the profit maximizing or loss minimizing

to $4.25 the loss minimizing level of production would be 7.

tinue to operate at this point?

ot be making a profit.

aximum Profit at Profit Maximizing Output

Marginal Costs = Marginal Revenues

Total Costs of Production

Total Fixed Costs (TFC)

Total Variable Costs (TVC)
Total Cost (TC)

1 2 3 4 5 6 7 8 9 10 11

Output
Total Fixed Costs (TFC)
Total Variable Costs (TVC)
Total Cost (TC)
 Monopoly Profit Maximizing Analysis

Price Per Unit Total Revenue

Total Output Units Total Costs (TC) Total Profit (TP)
(Demand) (TR)

0 $8.00 0.00 10.00 -10.00

1 $7.80 7.80 14.00 -6.20
2 $7.60 15.20 17.50 -2.30
3 $7.40 22.20 20.75 1.45
4 $7.20 28.80 23.80 5.00
5 $7.00 35.00 26.70 8.30
6 $6.80 40.80 29.50 11.30
7 $6.60 46.20 32.25 13.95
8 $6.40 51.20 35.10 16.10
9 $6.20 55.80 38.30 17.50
10 $6.00 60.00 42.70 17.30
11 $5.80 63.80 48.70 15.10
12 $5.60 67.20 57.70 9.50

Monopoly Profit Determination

16.00

14.00

12.00
Price, Marginal Revenue, and Costs

10.00

8.00

6.00

Monopoly Profit
4.00

2.00

0.00
1 2 3 4 5 6 7 8 9 10 11 12

Output
 2.00

0.00
1 2 3 4 5 6 7 8 9 10 11 12

Output

Revenue - Cost Comparison

80

70

60
Total Costs / Total Revenue

50

40

30

20

10

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

Output
 1. Explain in your own words why MC=MR is a profit maximizin
Average Total Marginal Cost Marginal At this output level the monopoly typically would be selling
Cost (ATC) (MC) Revenue (MR) produced, while they are also able to cover all their expenditure

2. Explain how the monopolist determines where to price his p

14.00 4.00 7.80 A monopolist will look at where MC = MR and then set the
8.75 3.50 7.40 demand curve.
6.92 3.25 7.00 3. A monopoly is considered an inefficient use of resources for
5.95 3.05 6.60 A monopoly is inefficient because prices are higher and out
5.34 2.90 6.20 style. Many resources go unused when a monopoly is in place.
4.92 2.80 5.80
4.61 2.75 5.40
4.39 2.85 5.00
4.26 3.20 4.60
4.27 4.40 4.20
4.43 6.00 3.80
4.81 9.00 3.40

nation

Price Per Unit (Demand)

Average Total Cost (ATC)
Marginal Cost (MC)
Marginal Revenue (MR)

10 11 12 13
 10 11 12 13

ison

Total Costs (TC)

Total Revenue (TR)

9 10 11 12
rds why MC=MR is a profit maximizing production level for the Monopoly.
e monopoly typically would be selling the product at a higher price than it is being
lso able to cover all their expenditures.

olist determines where to price his product?

at where MC = MR and then set the price to where the output level falls on the

ed an inefficient use of resources for what two reasons?

ent because prices are higher and output is much lower than any other market
nused when a monopoly is in place.

Demand Price

Average Total Cost

MC = MR