Theory question 102
Market StructuresTable 2 below shows the unit prices and quantities of hats produced by a firm. Study it and answer the questions that follow.
Quantity | Unit Price ($) | Total Revenue ($) | Marginal Revenue ($) | Average Revenue ($)
10 | 180 | 1,800 | – | 180
20 | 150 | 3,000 | 120 | X
30 | U | 3,600 | 60 | 120
40 | 100 | V | W | Y
50 | 80 | 4,000 | 0 | 80
60 | 60 | 3,600 | −40 | 60
(a) Compute the values of U, V, W, X and Y.
(b) In what type of market is the firm operating? Explain your answer.
(c) If the firm's marginal cost is $60.00 at all levels of output, at what level of output will it be in equilibrium? Explain your answer.
(d) If a total cost of $600.00 is incurred when 50 units of hats are produced, determine the margin of profit or loss made.
(e) What is another name for marginal cost?
Show the model answer
(a) U = 3,600 ÷ 30 = $120; V = 100 × 40 = $4,000; W = (4,000 − 3,600) ÷ 10 = $40; X = 3,000 ÷ 20 = $150; Y = 4,000 ÷ 40 = $100
(b) Imperfect competition (monopoly/monopolistic competition): price falls as more is sold, so AR slopes downward and MR is below AR.
(c) At 30 units, where MR = MC = $60; producing more would add less to revenue than to cost.
(d) At 50 units: TR = $4,000, TC = $600; profit = 4,000 − 600 = $3,400.
(e) Incremental cost (also called differential cost).
MR is per unit, so divide each change in TR by the change in quantity (10).