Using MS Excel or a table in MS Word, complete Table-1 (Joseph Farms, Inc., Cost and Revenue Data).
Assume that the price is $165.
Assume the fixed costs are $125, at an output level of 1.
Assume that the data represents a firm in pure competition.
Show your calculations.
Explain the MC=MR Rule. Describe the market structures to which this rule applies.
Create a chart to illustrate the data in Columns 9 and 10.
Describe the profit maximizing (or loss minimizing) output for this firm. Explain why or why not there an accounting profit?
Explain why a firm in pure competition is considered to be a “price taker.”
To complete Table-1 using MS Excel or MS Word:
1. Open Excel or Word and create a new document.
2. Create a table with the following columns:
- Output Level
- Quantity Sold
- Total Revenue
- Marginal Revenue
- Total Cost
- Marginal Cost
- Average Variable Cost
- Average Total Cost
- Profit
- Price
3. Fill in the data as given:
- Price: $165
- Fixed Costs: $125 at an output level of 1
- Assume the data represents a firm in pure competition, which means the price remains constant regardless of quantity sold.
Calculations:
1. Output Level: Start with 1 and increase it incrementally.
2. Quantity Sold: This will be equal to the Output Level.
3. Total Revenue: Multiply the Quantity Sold by the Price.
4. Marginal Revenue: The change in Total Revenue due to a change in Quantity Sold. Since the price is constant, Marginal Revenue is also equal to the Price.
5. Total Cost: Add the Fixed Costs to the Variable Costs.
6. Marginal Cost: The change in Total Cost due to a change in Quantity Sold.
7. Average Variable Cost: Variable Costs divided by Quantity Sold.
8. Average Total Cost: Total Costs divided by Quantity Sold.
9. Profit: Total Revenue minus Total Cost.
10. Price: remains constant at $165.
The MC = MR Rule:
The MC (Marginal Cost) = MR (Marginal Revenue) rule states that a firm maximizes its profit by producing at a quantity where the marginal cost is equal to the marginal revenue. In other words, the firm aims to produce an additional unit of output as long as the additional revenue gained from that unit is greater than or equal to the additional cost incurred. This principle is applicable to firms in all market structures.
Market Structures to which the MC=MR rule applies:
The MC=MR rule applies to firms operating in perfectly competitive, monopolistic, oligopolistic, and monopolistically competitive market structures. In all these market structures, firms aim to maximize their profits by equating marginal cost to marginal revenue.
Creating a chart for Columns 9 and 10:
To create a chart for the profit and price data in Columns 9 and 10, follow these steps:
1. Select the data in Columns 9 and 10.
2. Click on the "Insert" tab in the Excel or Word toolbar.
3. Choose the desired chart type (e.g., Line, Column, or Scatter) from the "Charts" section.
4. A chart will be generated based on the selected data.
Profit-maximizing output for this firm:
To determine the profit-maximizing output level, compare the profit values corresponding to different quantities sold. The output level with the highest profit indicates the profit-maximizing output for this firm.
Accounting profit in this scenario:
Accounting profit occurs when Total Revenue is greater than Total Costs. If the profit (Table-1, Column 9) is positive, it indicates an accounting profit. If it is negative, it means the firm is incurring a loss.
Why a firm in pure competition is considered a "price taker":
A firm in pure competition is considered a "price taker" because it has no control over the market price. In this market structure, there are numerous buyers and sellers, each producing a negligible amount compared to the total market. As a result, no individual firm can influence the market price. Hence, a firm in pure competition must accept the prevailing market price and adjust its output level accordingly.