Average cost Marginal cost Average cost Marginal cost Marginal Cost/Marginal Revenue (9) Marginal Cost Marginal Revenue ($) ONWARDNOD D-NWAMONOD Marginal revenue Marginal revenue Total cost Total revenue - Total cost o 10 20 30 40 50 60 70 20 90 100 0 10 20 30 40 50 60 70 80 90 100 Quantity (flash drives) Quantity (flash drives) (a) Price Intersects marginal cost above the average cost curve. (b) Price Intersects marginal cost on the average cost curve. At a price of $4, price Is at a level where producing at the quantity At a price of $3.20, the price is now at a level where producing at the where P - MC leads to a price that Is above average cost. In this quantity where P - MC leads to a price that Is equal to the average case, the firm is eaming a profit profit. Total revenue is the quantity of cost. Total revenue is now a quantity of 70 times a price of $3.20. To 80 times the price of $4. or $320. shown by the overall shaded tal cost is the same: a quantity of 70 times an average cost of $3.20. box. Total cost is the quantity of 80 times an average cost of $3.30, Zero profit is being earned in this situation. or $264, shown by the bottom shaded box. The leftover rectangle where total revenue exceeds total cost is the profit eamed. Total Fixed Variable Marginal Average Quantity Cost Cost Cost Cost Cost Average cost Marginal cost o $62 $62 10 $90 $62 $28 $2.80 $9.00 20 $110 $62 $48 $2.00 $5.50 Marginal Cost Marginal Revenue $) Loss (or negative $126 $62 $64 $1.60 $4.20 pront - $144 $82 $1.80 $3.60 Nwa Marginal $166 $104 $2.20 $3.32 total cost b revenue $192 $62 $130 $2.60 $3.20 $8 8 8 8 8 8 8 - Total revenue $224 $62 $162 $3.20 $3.20 10 20 30 40 50 60 70 80 90 100 $264 $62 $202 $4.00 $3.30 Quantity (flash drives) $324 $62 $262 $6.00 $3.60 (c) Price Intersects marginal cost below the average cost curve. $404 $62 $342 $8.00 $4.04 At a price of $2. 20, when the firm prod s at a quantity where P - MC. the price is below average cost. Here. the firm is suffering losses. Total costs are the large rectangle with a quantity of 50 and a price of $3.32. for total costs of $168. Total revenues are a quantity of 50 and a price of $2 20, or $110. box. The leftover er shaded s; that is. the amount that total Q4. Using exhibit 10-3 (above), in the long-run at the profit maximizing point, or profit- maximization condition, what can be said for the marginal cost, the marginal revenue and price in this example? In the long run, explain why this is true for all perfectly competitive firms