Short Run-Profit Maximization by a Perfectly Competitive Firm
Profit is found as total revenue (TR) minus total cost (TC). With that in mind, let us now consider the possible profits for the firm that we looked at in assignments 7 and 8, where the firm’s capital is fixed at 2 units and where the cost of capital is $40 per unit per period, while the cost of labor (or wage rate) is $30 per unit of labor per period and the firm has the following short run production function:
Labor: 0 1 2 3 4 5 6 7 8 9
Output: 0
6
24
60
120
170
210
240
260
270
Now, let us further assume that the firm is perfectly competitive (i.e., it is a price taker) and that it can sell each unit of the output that it produces for $3 [remember, for price takers, the price (P) is also the marginal revenue (MR)].
(a) Use this information set up a diagram (i.e., an excel chart) that shows total cost (TC) and total Revenue (TR) of the firm per period in the short run with the level of output on the horizontal axis.
(b) Also, use this information to then set up another diagram showing the firm's short-run marginal cost (MC) and marginal revenue (MR) with quantities on the horizontal axis.
(c) Copy both your charts into a Word or pdf file that also has an essay on the profit of the firm along with some discussion on the nature of profit maximization for perfectly competitive firms.