Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 8] PRICE AND OUTPUT UNDER PERFECT COMPETITION 187
EXAMPLE 5. In Table 8.2, columns (1) and (2) are the same as in Table 8.1. Columns (3) and (4) of Table 8.2 are
calculated directly from column (4) and column (1) of Table 8.1. (Since the MC values refer to the midpoints between successive
levels of output, the MC at 650 units of output is $8 and is the same as the MC recorded alongside 700 units of
output.) The values in column (5) are obtained by subtracting each value of column (4) from the corresponding value
in column (2). The values of column (6) are then obtained by multiplying each value of column (5) by the values in
column (1). Note that the values of total profits are the same as those in Table 8.1 (except for two very small rounding
errors). The firm maximizes total profits when it produces 650 units of output. At that level of output, MR ¼ MC and
MC is rising.
(1)
Q
(2)
P ¼ MR ($)
(3)
MC ($)
Table 8.2
(4)
AC ($)
(5)
Profits/Unit ($)
(6)
Total Profits ($)
100 8 12.00 20.00 212.00 21200
200 8 3.00 11.50 23.50 2700
300 8 1.00 8.00 0 0
400 8 1.25 6.31 þ1.69 þ676
500 8 2.50 5.55 þ2.45 þ1225
600 8 4.25 5.33 þ2.67 þ1602
650 8 (8.00) 5.40 þ2.60 þ1690
700 8 8.00 5.71 þ2.29 þ1603
800 8 24.00 8.00 0 0
EXAMPLE 6. The profit-maximizing, or best, level of output for this firm can also be viewed from Fig. 8-4 (obtained by
plotting the values of the first four columns of Table 8.2). As long as MR exceeds MC (from A 0 to D 0 ), it pays for the firm to
expand output. The firm would be adding more to its TR than to its TC and so its total profits would rise. It does not pay for
the firm to produce past point D 0 , since MC exceeds MR. The firm would be adding more to its TC than to its TR and so its
total profits would fall. Thus, the firm maximizes its total profits at the output level of 650 units (given by point D 0 , where P
or MR equals MC and MC is rising). The profit per unit at this level of output is given by D 0 D 00 or $2.60, while total profit is
given by the area of rectangle D 0 D 00 FG, which equals $1690.
Fig. 8-4