Microeconomics: Principles and Applications - Assignment Example

Firm

Price

quantity

TR

TC

Profit/loss

TVC

ATC

AVC

MC

1

4

300

3.5

3

5

2

20

200

-300

15

10

3

5100

-100

3000

30

90

4

25

100

0

2000

20

  In the competitive market, the firms are price takers as the sellers are many such that the action of any one seller has a negligible effect within the market (Hall, Robert & Marc, p 62). Pricing is determined by the extra cost incurred in producing one extra unit of the commodity such that price is equated to marginal cost i.e. Price=MC. Since the main objective of these firms is to maximize profit the following measures are appropriate for the respective firms.

Firm 1: This firm should retain its price at 4 units and maintain its AVC at 3 units so that it can maximize profit and minimize loss. This is because as long as P>AVC the firm will recover its cost of operation plus extra revenue which goes to profit.

Firm 2: In this firm, the price is 10 which equals MC at 10 and therefore qualifies to be in the competitive market but since VC>TR it will make losses as the firm is not even meeting the break-even point. The policy to be adopted by the firm is to reduce the variable cost and squeeze the fixed cost which is not affected by the variations in output.

Firm 3: In this firm, the losses arising from employing many variable factor inputs which outweigh the fixed, and therefore the best recommendation is a freeze in employing variable factor inputs like reducing the casual labor size.

Firm 4: In this firm the price (25) is greater than AVC i.e. P>AVC and this already ensures that it beat the break-even point. This is responsible for its zero economic profit. For the firm to do better it either maintains its current output or reduces price.                                                           

These are the firms under a monopoly market structure and their details

Firm

price

quantity

TR

MR

TC

Profit/loss

TVC

ATC

AVC

MC

1

10

100

+50

30

7

2

50

2500

2600

52

32

50

3

8000

+2000

5000

8

5

4

90

2250

+750

60

50

50

  In a monopoly market, the firm tends to be the sole seller and therefore has the power to give any price by manipulating the output (Hall, Robert & Marc, p 64). Under this market structure, for profit maximization the MC=MR. In this respect the firms above needs the following recommendations.

Firm 1: The firm is doing well as the P>MC and that is responsible for the abnormal profit. It should maintain that output and profit.

Firm 2: This firm has TC>TR which means that it will make a loss. This is because it’s MC=P but the AVC is high calling for a cut in the use of variable factor input.

Firm 3: The profit is supernormal and can be attributed to high sales volumes. The firm can maintain its current strategies.

Firm 4: The firm has made an abnormal profit due to ATC>MC and should be recommended to maintain its output and input.