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Chapter 8: Q18 (page 212)

What two rules does a perfectly competitive firm apply to determine its profit-maximizing quantity of output?

Short Answer

Expert verified

Perfect Competition, Rules for profit maximising output : Maximum Gap between Total Revenue & Total Cost ; Marginal Revenue = Marginal Cost

Step by step solution

01

Perfect Competition Definition 

It is a market, where large number of buyers and sellers exchange homogeneous goods at constant prices.

02

Profit Maximisation Concept  

Profit is the difference between Total Revenue and Total Cost.

Output at which profit is maximised satisfies following conditions

  • Difference between total revenue and total cost curves is maximum. Slopes of both the curves are equal.
  • Marginal Revenue = Marginal cost, and the curves intersect.

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Most popular questions from this chapter

The AAA Aquarium Co. sells aquariums for \(20 each. Fixed costs of production are \)20. The total variable costs are \(20 for one aquarium, \)25 for two units, \(35 for the three units, \)50 for four units, and $80 for five units. In the form of a table, calculate total revenue, marginal revenue, total cost, and marginal cost for each output level (one to five units). What is the profit-maximizing quantity of output? On one diagram, sketch the total revenue and total cost curves. On another diagram, sketch the marginal revenue and marginal cost curves.

What is a “price taker” firm?

Assuming that the market for cigarettes is in perfect competition, what does allocative and productive efficiency imply in this case? What does it not imply?

Perfectly competitive firm Doggies Paradise Inc. sells winter coats for dogs. Dog coats sell for \(72 each. The fixed costs of production are \)100. The total variable costs are \(64 for one unit, \)84 for two units, \(114 for three units, \)184 for four units, and $270 for five units. In the form of a table, calculate total revenue, marginal revenue, total cost and marginal cost for each output level (one to five units). On one diagram, sketch the total revenue and total cost curves. On another diagram, sketch the marginal revenue and marginal cost curves. What is the profit-maximizing quantity?

In the argument for why perfect competition is allocatively efficient, the price that people are willing to pay represents the gains to society and the marginal cost to the firm represents the costs to society. Can you think of some social costs or issues that are not included in the marginal cost to the firm? Or some social gains that are not included in what people pay for a good?
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