Costs Theory And Market Structures

CASE STUDY





Cost theory and market structures











































1. Perfect competition

A perfectly competitive firm has the cost structure given below (complete the table):

|Output |Fixed |Total |Average |Marginal |Total |Marginal |Total profits (or |
||cost |cost |total cost |cost |revenue |revenue |losses) |
|1 |$100 |$190,00 |$190,00 |$190,00 |$150 |$150 |-$40,00 |
|2 |$100 |$270,00 |$135,00 |$80,00 |$300 |$150 |$30,00 ||3 |$100 |$339,99 |$113,33 |$69,99 |$450 |$150 |$110,01 |
|4 |$100 |$400,00 |$100,00 |$60,01 |$600 |$150 |$200,00 |
|5 |$100 |$470,00 |$94,00 |$70,00 |$750 |$150 |$280,00|
|6 |$100 |$550,02 |$91,67 |$80,02 |$900 |$150 |$349,98 |
|7 |$100 |$640,01 |$91,43 |$89,99 |$1.050 |$150 |$409,99 |
|8 |$100 |$750,00 |$93,75 |$109,99 |$1.200 |$150 |$450,00|
|9 |$100 |$880,11 |$97,79 |$130,11 |$1.350 |$150 |$469,89 |
|10 |$100 |$1.030,00 |$103,00 |$149,89 |$1.500 |$150 |$470,00 |

a. At a market price of $150, how many units would this firm produce? What will its profits be?


The followingformulas were used in order to calculate the above presented values:

Average Total Cost (ATC) = Total Cost (TC) / Quantity (Q) (TC = ATC x Q
Marginal Cost (MC) = ∆TC / ∆Q
Marginal Revenue (MR) = ∆Total Revenue (TR) / ∆Q (∆TR = MR x ∆Q
Profit = TR - TC
Variable Costs (VC) = Total Costs – Fixed Costs

By increasing the amount of units output the total costs rise as well; the amount ofproducing one more unity is called the marginal cost. Similarly, the value of selling one additional unit is called marginal revenue. In a competitive market, marginal revenue is equal to the product market price. This price is constant because the firm prices the product independently of how much it produces (this implicates that average revenue is also constant). Because marginal costs increases withthe amount of quantity produced, the optimal number of units that a firm should produce is when marginal costs equal the product price (and marginal revenue).
In the case where the market price is $150 the optimal units that this firm should produce are 10 units. Total profits equal total revenue minus total costs. For this market price the profit is $470.

















b.At a price of $130, how much will it produce? Profits?
Below are presented all values related with the new market price:

|Output |Fixed |Total |Average |Marginal |Total |Marginal |Total profits (or |
| |cost |cost |total cost |cost |revenue |revenue |losses) ||1 |$100 |$190,00 |$190,00 |$190,00 |$130 |$130 |-$60,00 |
|2 |$100 |$270,00 |$135,00 |$80,00 |$260 |$130 |-$10,00 |
|3 |$100 |$339,99 |$113,33 |$69,99 |$390 |$130 |$50,01...