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Chapter 8: Problem 16

How does a perfectly competitive firm calculate total revenue?

Short Answer

Expert verified
In a perfectly competitive market, a firm calculates its total revenue by multiplying the market-determined price (P) by the quantity of units it produces and sells (Q), using the formula: \(TR = P \times Q\), where TR is the total revenue, P is the market-determined price per unit, and Q is the quantity of units sold. The firm has no influence over the price and must accept the price set by the overall market equilibrium.

Step by step solution

01

1. Understand Perfectly Competitive Market Characteristics

A perfectly competitive market is an economic market structure that is characterized by: - A large number of small firms, each producing an identical product - Perfect information available among all market participants - No barriers to entry or exit - Price-taking behavior, where firms accept the market-determined price rather than influencing it These characteristics imply that each firm in a perfectly competitive market has no power over the market price and must accept the price set by the overall market supply and demand forces.
02

2. Define Total Revenue

Total revenue is the total amount of money a firm earns from selling its products or services. It is calculated by multiplying the price per unit of the product sold by the quantity of units sold (i.e., Price x Quantity). Mathematically, this can be represented as: \[TR = P \times Q\] Where TR is total revenue, P is the price per unit, and Q is the quantity of units sold.
03

3. Calculate Total Revenue in Perfectly Competitive Market

In a perfectly competitive market, the firm's total revenue is determined by taking the market price (P) as given (since the individual firm has no influence over price) and multiplying it by the quantity of units produced and sold (Q) by the firm. Thus, we use the same formula as in step 2: \[TR = P \times Q\] However, the key difference for a perfectly competitive firm is that the price (P) component in the formula is determined by the overall market equilibrium, and the firm must accept this price when calculating its total revenue. To summarize, a perfectly competitive firm calculates its total revenue by multiplying the market-determined price by the quantity of units it produces and sells.

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Most popular questions from this chapter

Will a perfectly competitive market display allocative efficiency? Why or why not?

What are the four basic assumptions of perfect competition? Explain in words what they imply for a perfectly competitive firm.

Explain how the profit-maximizing rule of setting \(\mathrm{P}=\mathrm{MC}\) leads a perfectly competitive market to be allocatively efficient.

A computer company produces affordable, easy-to-use home computer systems and has fixed costs of \$250. The marginal cost of producing computers is \(\$ 700\) for the first computer, \(\$ 250\) for the second, \(\$ 300\) for the third, \(\$ 350\) for the fourth, \(\$ 400\) for the fifth, \(\$ 450\) for the sixth, and \(\$ 500\) for the seventh. a. Create a table that shows the company's output, total cost, marginal cost, average cost, variable cost, and average variable cost. b. At what price is the zero-profit point? At what price is the shutdown point? c. If the company sells the computers for \(\$ 500,\) is it making a profit or a loss? How big is the profit or loss? Sketch a graph with \(\mathrm{AC}, \mathrm{MC},\) and \(\mathrm{AVC}\) curves to illustrate your answer and show the profit or loss. d. If the firm sells the computers for \(\$ 300,\) is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVC curves to illustrate your answer and show the profit or loss.

What two lines on a cost curve diagram intersect at the shutdown point?
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