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Then use Columns (2) and (3) figures to illustrate Total Revenue on Study Guide Fig. 1—i.e., show Total Revenue associated with various output quantities. Join the points with a smooth curve. Disregard momentarily the TC curve already drawn on Fig. 1.

с. Notice that this demand schedule becomes price-inelastic , when price is sufficiently lowered—specifically, when price reaches $(8/7/6/5/4).

The graph of Columns (1) and (2) of Table 2 is already drawn on Fig.1 as a Total Cost curve (TC). (Mark the curve you drew in question 5 as TR, to distinguish it from the cost curve.)

It is now possible to see at once why the profit-maximizing process outlined here is a simple one. The firm is doing nothing more than to search for the output at which the vertical distance between TR and TC is greatest. This distance, for any output, is (fixed cost/price/profit or loss). (If TR is above TC, it is profit; if TC is above, it is loss.' So it is preferable to look for "greatest vertical distance" with ГД above TC. The greatest distance with ГС on top marks the maximum-possible loss, which is somewhat less desirable as an operating position.)

6. Figure 1 is too small to indicate quickly the precise Maximum-profit position. But even a glance is sufficient to indicate that this best-possible position is approximately i.45/65/85) units of output.

The firm can be thought of as gradually increasing its output and sales, pausing at each increase to see if its profit position is improved. Each extra unit of output brings in

a little more revenue (provided demand has not vet moved to the price-inelastic range); and each extra unit incurs a little more cost. The firm's profit position is improved if this small amount of extra revenue (exceeds/is equal to/is less than) the small amount of extra cost.

More elegantly put, output should be increased, for it will yield an increase in profit, if Marginal Revenue (MR) (exceeds/is equal to/is less than) Marginal Cost (MC). The firm should cut back its output and sales if it finds that MR (exceeds/is equal to/is less than) MC.

And so the "in-balance" position is where MR is (less than/equal to/greater than) MC.

7. A more careful development of the Marginal Revenue idea is needed. Column (4) in Table 1 shows the extra number of units sold if price is reduced. Column (5) shows extra revenue (positive or negative) accruing from that price reduction. Complete the blanks in these two columns to familiarize yourself with the meanings involved.

8. The general profit-maximizing rule is: Expand your output until you reach the output level at which MR = MC—and stop at that point.

The profit-maximizing rule for the firm in pure (or perfect) competition: P = MC. This is nothing but a particular instance of the MR = MC rule. It is assumed in pure (or perfect) competition that the demand curve facing the individual firm is perfectly horizontal, or perfectly price- (elastic/inelastic}. That is, if market price is $2, the firm receives (less than $2 /exactly $2/more than $2) for each extra unit that it sells. In this special case, MR (extra revenue per unit) is (greater than/the same thing as/less than) price per unit (which could be called Average Revenue, or revenue per unit). So in pure (or perfect) competition, P == MC and MR = MC are two ways of saying the same thing.

9. In imperfect competition, the firm's demand curve is—and things are different. From inspection of the figures in Table 1 [compare Columns (1) and (6)], it is evident that with such a demand curve, MR at any particular output is (greater than/the same thing as/less than) price for that output.

Why is this so? Suppose, at price $7, you can sell 4 units; at price $6, 5 units. Revenues associated with these two prices are respectively $28 and $30. Marginal Revenue from selling the fifth unit is accordingly $(2/5/6/7/28/30). It is the difference in revenue obtained as a result of selling the one extra unit. Why only $2—when the price at which that fifth unit sold was 86? Because to sell that fifth unit, price had to be reduced. And that lowered price applies to all 5 units. The first 4, which formerly sold at $7, now bring only $6. On this account, revenue takes a beating of $4. You must subtract tins $4 from the $6 which the fifth unit brings in. This leaves a net gain in revenue of $2—Marginal Revenue.

10. To return to the fortunes of the firm in Tables 1 and 2: The tables do not provide sufficient unit-by-unit detail to show the exact Maximum-profit output level. But Table 1 indicates that between sales outputs of 63 and 71, MR is $1.63. The MR figures fall as sales are expanded, so that the $1.63 would apply near the midpoint of this range, say at output 67. It would be somewhat higher between 63 and 66; somewhat lower between 68 and 71.

Similarly, MC (Table 2) would be SI.60 at output of about 67 units. So the Maximum-profit position would fall very close to 67 units produced and sold per period.

To sell this output, the firm would charge a price (see Table 1) of about 8(7 '5.75/4/1.60). Its Total Revenue [look for nearby figures in Column (3)] would be roughly $(380/580/780). Its Total Cost (Table 2) would be roughly ^(310/510/710), leaving profit per period of about $70.

$5.75; $380; $310.

The text notes that in geometric terms Marginal Revenue can be depicted as the slope of the Total Revenue curve.

Tills can be illustrated by looking more carefully at the Total Revenue curve you have drawn in Study Guide Fig. 1. Study Guide Fig. 2 shows an enlargement of a small segment of that curve: that part of the curve between output quantities of 25 and 31. If 25 units are sold, the price is 810 and Total Revenue is $250. This is point A on Fig. 2. If price is reduced to $9, that increases sales by 6 units, from 25 units to 31 units. Thus Total Revenue becomes $279 (31 multiplied by $9). So, if the firm reduces price from $10 to $9, in effect it moves from point A to point B.

Figure 2's heavier, curved line is the smooth curve used to join points A and B. It is an approximation of the points that would be obtained if we had quantity and revenue information on prices such as '59.90, S9.SO, and so on.

There is also a straight line (the thin line) joining A and B. It is close to the probable true Total Revenue curve although it is not likely to be the exact curve.

Instead of dropping from price $10 all the way to $9, suppose we had moved only to (say) $9.60. That would have produced (roughly) a 2-unit increase in quantity demanded. In this way, we would move closer to the true MR figure than our previous 6-unit approximation supplied. In Fig. 2 terms, we would be moving from A only to

D, not from A to B. Notice carefully that the straight line (the thin line) joining A to D becomes a (better/poorer) approximation of the presumed true Total Revenue curve than was the case when the points involved were A and B.

In sum, the closer we move point B to point A (for example, if we make it D rather than B), the closer the slope figure comes to being a measure of the true MR figure. Strictly speaking, we have true MR (the rate of change in revenue as measured in terms of 1-unit output changes) only when the line whose slope is being measured and used to indicate MR is actually tangent to the Total Revenue curve.

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