Principles of Microeconomics / Unit 9 MIC 0806 worked example, 60 to 90 seconds
A Monopolistic Competitor's Quantity, Price and Profit
The idea
From the firm's own demand schedule, compute total revenue and marginal revenue between rows. Compare marginal revenue with marginal cost and take every step where marginal revenue is at least marginal cost. Read the price from the demand schedule at that quantity. Then profit is price minus average total cost, times the quantity. The method is the monopoly method applied to a slice of the market.
In practice
Worked example: the pizza shop's revenue is four hundred, five forty, six forty, seven hundred and seven twenty at twenty, thirty, forty, fifty and sixty pizzas, so marginal revenue per pizza for each added ten is fourteen, ten, six and two. Marginal cost per pizza for those steps is six, eight, ten and twelve. The second ten pays, fourteen against six; the third pays, ten against eight; the fourth does not, six against ten. Quantity forty, price sixteen from demand, average total cost thirteen: profit three dollars a pizza, one hundred twenty a day.
Where people slip
Read the price from demand, not from marginal revenue, and compute marginal revenue from the change in total revenue, never from the price of the added units alone. And record the profit; it is the signal the next video acts on.
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