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Question
Can there be a positive level of output that a profit-maximising firm produces in a competitive market at which market price is not equal to marginal cost? Give an explanation.
Solution
There cannot be any positive level of output that a firm produces at which price is not equal to MC. Let us evaluate the following two cases where price is not equal to MC.
Case A:- If P > MC
At output Oq1, Price is Kq1, while the MC is Lq1. So, Oq1 is not the profit maximising output. This is due to the fact that the firm can increase its profit level by expanding its output to Oq2.
Case B:- If P < MC
At output Oq3, price is Hq3 and MC is Gq3. So, Oq3 is not the profit maximising output. This is because the firm can increase its profit by reducing its output level to Oq2.
Thus, at profit maximising point, price must be equal to MC and it cannot be greater or lesser than MC.
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The following table shows the total revenue and total cost schedules of a competitive firm. Calculate the profit at each output level. Determine also the market price of the good.
|
Quantity Sold |
TR (Rs.) |
TC (Rs.) |
Profit |
|
0 |
0 |
5 |
|
|
1 |
5 |
7 |
|
|
2 |
10 |
10 |
|
|
3 |
15 |
12 |
|
|
4 |
20 |
15 |
|
|
5 |
25 |
23 |
|
|
6 |
30 |
33 |
|
|
7 |
35 |
40 |
The following table shows the total cost schedule of a competitive firm. It is given that the price of the good is Rs 10. Calculate the profit at each output level. Find the profit maximising the level of output.
|
Quantity Sold |
TC (Rs.) |
|
0 |
5 |
|
1 |
15 |
|
2 |
22 |
|
3 |
27 |
|
4 |
31 |
|
5 |
38 |
|
6 |
49 |
|
7 |
63 |
|
8 |
81 |
|
9 |
101 |
|
10 |
123 |
