Question

q1 Assignment 9 (Due next class) 1. 2. Explain why price-marginal revenue? Explain why average revenue = average cost under perfect condition. What is the condition for a firm to make a profit in perfect competition? P297, Q4 (remember to calculate MR and MC), Q 8. Look at Q 10, 11. 4. 5.

Answer 1

1.

It happens in prefect competition market system where firms are price taker but not price setter – the price (P) is fixed in the market and it becomes perfectly elastic.

We take an example as below for understanding.

Let the price is $5 and there are 1, 2, 3, 4, and 5 quantities (Q). Marginal revenue (MR) is the difference of TR in two successive units.

Q	P	TR = Q × P	MR = TR(n) – TR(n-1)
1	5	5	5 – 0 = 5
2	5	10	10 – 5 = 5
3	5	15	15 – 10 = 5
4	5	20	20 – 15 = 5
5	5	25	25 – 20 = 5

Since there is no price discrimination, the price becomes equal to MR and parallel to horizontal axis.

2.

In perfect competition the average revenue (AR) becomes equal to price and MR, since price is fixed in the market it sometimes below the average cost (AC) establishing an economic loss, sometimes above the average cost establishing an economic profit, and sometimes equal to average cost establishing a normal profit.

A sample graph is as below: MC Price AC AR (Demand) MR Output Equilibrium condition is MC MR at E point, where (P- AC) and there is no economic profit or loss but the firm enjoys normal profit. Basically it happens in the long-run.

3.

Required condition is (P = MC) and AC must be atleast equal to price.

It is shown in the above graph, where (P = MC) happens at E point; there may not be any economic profit but there is normal profit.