Support the Monkey! Tell All your Friends and Teachers

Help / FAQ


(B) Numerical Example: The profit maximization of a firm with equality between Marginal Revenue and Marginal Cost can be illustrated with the help of a numerical example:

Produ-ction Output TC MR=AR=P=$5 TR MC ATC Profits
Units Produced     (II * V)     (V - II)
1 - 40 - - - - -40
2 4 50 5 20 2.5 12.5 -30
3 11 60 5 55 1.42 5.45 -5
4 18 70 5 90 1.42 3.89 +20
5 23 80 5 115 2 3.46 +35
6 25 90 5 125 5 3.6 +35
7 26 100 5 130 10 3.84 +30

In the example, output units produced have been shown in column II as 4, 11...etc. Total Cost appears in column III as 40, 50...etc. In column IV we find Marginal Revenue which is assumed to be $5 and which remains constant. This is because the firm is operating under competition. If we assume market price as $5 per unit then AR = MR = 5 which remains fixed. In column V we have Total Revenue as Output ´ Price or Marginal Revenue. Hence these values are 4 ´ 5 = 20, 11´ 5 = 55...etc. In columns VI and VII the values of Marginal and Average Total Cost are stated (respectively). Column VIII shows the total profits of the firm. Profits are the difference between Total Revenue and Total Cost. Hence profits are seen to be

0 - 40 = - 40,

20 - 50 = - 30,

55 - 60 = -5,

90 - 70 = 20,

115 - 80 = 35,

125 - 90 = 35 and

130 - 100 = 30.

Initially for the first three units of productive activity, TC exceeds TR and profits are negative. From the 4th unit onwards, profits become positive. Between the 5th and the 6th units, profits are maximum and profit value is $35. Beyond this output level, the profit starts falling again. The equilibrium position has been marked in the table. It is between the 5th and the 6th units. It is clear that when a firm attains equilibrium its Marginal Revenue is equal to Marginal Cost. Again, MR = MC = 5. Between these output units, the Average Total Cost of production is minimum i.e. between 3.46 to 3.60. Every requirement of a firm’s equilibrium under competition has been satisfied at an output level of 6 units.

[next page]

Index

10.1 - Features of Competition
10.2 - Competitive Equilibrium
10.3 - Short Run Equilibrium
10.4 - Long Run Equilibrium
10.5 - Exit or Shutdown Point

Chapter 11

All Contents Copyright © All rights reserved.
Further Distribution Is Strictly Prohibited.

Search:
Keywords:
In Association with Amazon.com