Questions on Average Cost and Revenue

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Question 1. A) The average cost and revenue are simply the mean of the cost and revenue per unit of output, at a given output level. The marginal cost and revenue are the cost and revenue from each additional unit of output, at the given level of output. The average cost, marginal cost, average revenue and marginal revenue for this product is as follows: Question 1 Output Total Costs AC MC Total Revenue AR MR 0 1 0 1 13 13 12 27 27 27 2 24 12 11 53 26.5 26 3 33 11 9 78 26 25 4 40 10 7 102 25.5 24 5 50 10 10 125 25 23 6 66 11 16 147 24.5 22 7 84 12 18 168 24 21 8 104 13 20 188 23.5 20 9 126 14 22 207 23 19 10 150 15 24 225 22.5 18 b) The following graph illustrates average cost, marginal cost, average revenue and marginal revenue. The point of profit maximization under any industry structure is the point where marginal revenue equals marginal cost (CliffNotes, 2012). In this example, that is where output is 8 units, and both MC and MR = $20. At this combination of price and output, the output is 8. The total revenue is $188 and the total costs are $104, so the profit at this point is $84. d. While MC=MR is the point of profit maximization for all industries, this industry appears to be in a state of monopoly. The marginal cost declines during the early stages of output increase, then begins to increase. It is during these early stages of output increase, where marginal revenue remains

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