Totql revenue minus total cost PDF

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Chapter 8: Perfect Competition: 8-2a Total Revenue Minus Total Cost Book Title: Micro ECON Printed By: Ashley Rader ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

8-2a Total Revenue Minus Total Cost The firm maximizes economic profit by finding the quantity at which total revenue exceeds total cost by the greatest amount. The firm’s total revenue is simply its output times the price. Column (1) in Exhibit 8.2 shows the farmer’s output possibilities measured in bushels of wheat per day. Column (2) shows the market price of $5 per bushel, a price that does not vary with the farmer’s output. Column (3) shows the farmer’s total revenue, which is price times quantity, or column (2) times column (1). And column (4) shows the farmer’s total cost of supplying each quantity shown. Total cost already includes a normal profit, so total cost includes all opportunity costs. Although the table does not distinguish between fixed and variable costs, fixed cost must equal $15 per day because total cost is $15 when output is zero. The presence of fixed cost tells us that at least one resource is fixed, so the farm must be operating in the short run.

Exhibit 8.2 Maximizing Short-Run Profit for a Perfectly Competitive Firm (3) Total

(2)

(1)

(4)

Bushels Marginal Revenue

Total

of

Revenue

Cost

Wheat

(Price)

(TC)

(5) Marginal Cost (6) Average Total Cost

(7) Economic Profit or

per Day (p) ( q) 0

—

$0

$15.00

—

—

$−15.00

1

$5

5

19.75

$4.75

$19.75

−14.75

2

5

10

23.50

3.75

11.75

−13.50

3

5

15

26.50

3.00

8.83

−11.50

4

5

20

29.00

2.50

7.25

−9.00

5

5

25

31.00

2.00

6.20

−6.00

6

5

30

32.50

1.50

5.42

−2.50

7

5

35

33.75

1.25

4.82

1.25

8

5

40

35.25

1.50

4.41

4.75

9

5

45

37.25

2.00

4.14

7.75

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(1)

(2)

(3) Total

(4)

Bushels Marginal Revenue

Total

of

Revenue

Cost

Wheat

(Price)

(TC)

(5) Marginal Cost (6) Average Total Cost

(7) Economic Profit or

per Day (p) ( q) 10

5

50

40.00

2.75

4.00

10.00

11

5

55

43.25

3.25

3.93

11.75

12

5

60

48.00

4.75

4.00

12.00

13

5

65

54.50

6.50

4.19

10.50

14

5

70

64.00

9.50

4.57

6.00

15

5

75

77.50

13.50

5.17

−2.50

16

5

80

96.00

18.50

6.00

−16.00

At each output rate, total revenue in column (3) minus total cost in column (4) yields the farmer’s economic profit or economic loss in column (7). As you can see, total revenue exceeds total

“It has been said, ‘In perfect competition there is no competition.’”

cost at rates of output between 7 and 14 bushels, so the farm earns an economic profit at those output rates. Economic profit is maximized at $12 per day when the farm produces 12 bushels of wheat per day (the $12 and 12 bushels combination here is just a coincidence). These hypothetical data are graphed in panel (a) of Exhibit 8.3, which shows the total revenue and total cost curves. As output increases by 1 bushel, total revenue increases by $5, so the farm’s total revenue curve is a straight line emanating from the origin, with a slope of 5. The short-run total cost curve has the backward S shape introduced in Chapter 7, showing increasing and then diminishing marginal returns from the variable resource. Total cost always increases as more output is produced. Exhibit 8.3

Short-Run Profit Maximization for a Perfectly Competitive Firm In panel (a), the total revenue curve for a perfectly competitive firm is a straight line with a slope of 5, the market price. Total cost increases with output, first at a decreasing rate and then at an increasing rate. Economic profit is maximized where https://ng.cengage.com/static/nb/ui/evo/index.html?deploymentId=583265219313318568251256031&eISBN=9781337914413&id=678781607&nbId=1… 2/4

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total revenue exceeds total cost by the greatest amount, which occurs at 12 bushels of wheat per day. In panel (b), marginal revenue is a horizontal line at the market price of $5. Economic profit is maximized at 12 bushels of wheat per day, where marginal revenue equals marginal cost (point e). That profit equals 12 bushels multiplied by the amount by which the market price of $5 exceeds the average total cost of $4. Economic profit is identified by the shaded rectangle in panel (b).

Subtracting total cost from total revenue is one way to find the profit-maximizing output. For output less than 7 bushels and greater than 14 bushels, total cost exceeds total revenue. The economic loss is measured by the vertical distance between the two curves. Between 7 and 14 bushels per day, total revenue exceeds total cost. The economic profit, again, is measured by the vertical distance between the two curves. Profit is maximized at the rate of output where total revenue exceeds total cost by the greatest amount. Profit is greatest when 12 bushels are produced per day. Chapter 8: Perfect Competition: 8-2a Total Revenue Minus Total Cost Book Title: Micro ECON https://ng.cengage.com/static/nb/ui/evo/index.html?deploymentId=583265219313318568251256031&eISBN=9781337914413&id=678781607&nbId=1… 3/4

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Printed By: Ashley Rader ([email protected]) © 2019 Cengage, Cengage Learning, Inc. © 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder.

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