SECOND BATCH OF STUDY FROM HOME

ACTIVITIES (PROBLEM SOLVING)

EXERCISE IX
Theory of Cost and Profit

TEST I: PROBLEM SOLVING

Sol Buenafe’s Company operates under a purely competitive market structure producing love
potions at a price of Php 55.00 per unit. Compute the table below.

A. Compute TR and TP. Show your Computation.

Output Total Cost (TC) Total Revenue (TR) Total Profit (TP)
0 14 0 -14
1 25 55 30
2 58 110 52
3 75 165 90
4 105 220 115
5 131 275 144
6 164 330 166
7 197 385 188
8 220 440 220
9 283 495 212
10 311 550 239

Computations of (TR) and (TP)

Price x Quantity = TR TR – TC = TP
55.00 x 0 = 0 0 – 14 = -14
55.00 x 1 = 55 55 – 25 = 30
55.00 x 2 = 110 110 – 58 = 52
55.00 x 3 = 165 165 – 75 = 90
55.00 x 4 = 220 220 – 105 = 115
55.00 x 5 = 275 275 – 131 = 144
55.00 x 6 = 330 330 – 164 = 166
55.00 x 7 = 385 385 – 197 = 188
55.00 x 8 = 440 440 – 220 = 220
55.00 x 9 = 495 495 – 283 = 212
55.00 x 10 = 550 550 – 311 = 239

B. Graph TR, TC and TP in a single graph. Label your graph completely

C. Using the TR = TC approach, at what output is the firm having maximum profit? Why?

 Under the TR = TC approach, the firm maximized profit at output 10. It is because it
reaches the maximum amount of total profit which is 239.

D. At what output is the firm minimizing cost?

 In the output 1 and output 3, the firm minimized the cost since it generates the lowest
average cost which is 25. The average cost was computed by dividing the total cost to
the number of output.

E. At what output is the firm break-even? Why?

  Based on the table completed, it tends to be seen that there is no such output who
gained break-even. This is because the firm does not have zero profit wherein the
benefit (TR) equals the cost (TC).

EXERCISE XI
Price and Output Determination under Oligopolistic Market

TEST I: Indicate if the following characteristics exist in oligopolistic market by putting a ( ✓) check
before those that are and a (x) cross for those that are not.

X 1. Easy entry into the market

✓ 2. Uniform pricing of product.
✓ 3. Interdependence of action among sellers
✓ 4. Products sold may be homogenous or differentiated
✓ 5. Non-price competition is prevalent
✓ 6. Sellers enjoy a degree of market control
✓ 7. The seller’s marginal revenue is lower that price
✓ 8. Profit is maximized where MR = Mc
✓ 9. A decrease in the price of one seller is usually matched by price decreases of his rivals
✓ 10. The marginal revenue curve is truncated

TEST II: Complete the following table

A. Complete the table and graph.
Total Total Marginal Marginal Marginal
Total
Price Quantity Revenue Profit Revenue Cost Profit
Cost (TC)
(TR) (TP) (MR) (MC) (MP)
P40 0 0 30 -30 - - -
35 2 70 50 20 35 10 25
30 3 90 100 -10 20 50 -30
25 6 150 120 30 20 6.67 13.33
20 8 160 150 10 5 15 -10
15 10 150 175 -25 -5 12.5 -17.5
10 12 120 200 -80 -15 12.5 -27.5
5 14 70 250 -180 -25 25 -50
Computation of TR, TP, MR, MC and MP
Price x Quantity = TR TR – TC = TP ∆TR / ∆Q = MR ∆TC / ∆Q = MC MR – MC = MP
40 x 0 = 0 0 – 30 = -30 – – –
35 x 2 = 70 70 – 50 = 20 70 - 0 / 2 - 0 = 35 50 - 30 / 2 - 0 = 10 35 – 10 = 25
30 x 3 = 90 90 – 100 = -10 90 - 70 / 3 - 2 = 20 100 - 50 / 3 - 2 = 50 20 – 50 = -30
25 x 6 = 150 150 – 120 = 30 150 - 90 / 6 - 3 = 20 120 - 100 / 6 - 3 = 6.67 20 – 6.67 = 13.33
20 x 8 = 160 160 – 150 = 10 160 - 150 / 8 - 6 = 5 150 - 120 / 8 - 6 = 15 5 – 15 = -10
15 x 10 = 150 150 – 175 = -25 150 - 160 / 10 - 8 = -5 175 - 150 / 10 - 8 = 12.5 -5 – 12.5 = -17.5
10 x 12 = 120 120 – 200 = -80 120 - 150 / 12 - 10 = -15 200 - 175 / 12 - 10 = 12.5 -15 – 12.5 = -27.5
5 x 14 = 70 70 – 250 = -180 70 - 120 / 14 - 12 = -25 250 - 200 / 14 - 12 = 25 -25 – 25 = -50
B. Identify profit maximization point using:
1. TR = TC approach

 Under this approach, profit is maximized when the output and the price of the product
of the firm reaches it maximum profit. Predicated on the table and on the graph, at
output 6 and price of 25 the firm maximized profit.

2. MR = MC approach

 Under this approach, profit is maximized when the quantity of Marginal Revenue equals
the Marginal Cost. In this case, it does not designate which output and price the firm
maximized profit if this approach will be utilized.

C. How much is the maximum profit?

 Based on the table completed, the maximum profit is 30 which fall at output 6 and a
price of 25.

D. What kind of market is this? Why?

 Based on the table completed, I think this is an oligopolistic market because the
marginal revenue of the firm experienced downward negatively slope indicating that the
MR curve lowers that on the price. This imperatively insinuates that it is not efficient for
the sellers to lower the price given that the output is incrementing because it will
definitely generate losses.

EXERCISE XII
Price and Output Determination under Monopolistic Competition

TEST I: Indicate if the following characteristics exist in a monopolistic competition by putting YES
before those that are and a NO for those that are not.

YES 1. Product Differentiation.

YES 2. Brand loyalty.
NO 3. Uniform pricing of commodities.
YES 4. Sellers enjoy a certain degree of market control.
NO 5. Perfect knowledge of market conditions.
NO 6. Interdependent action of sellers.
YES 7. Free entry into ad exit from the market.
YES 8. Consumers enjoy variety of goods.
YES 9. Producers tend to operate at full capacity.
YES 10. The seller’s marginal revenue is identical to price.
YES 11. The seller faces a downward sloping demand curve.
YES 12. The elasticity of demand for the seller’s product is determined by the buyer’s attachment to
the product.
YES 13. Sellers advertise their product.
 YES 14. Branding, labeling, packaging, shaping and differentiation in physical attributes are
practiced.
YES 15. Profit is maximized where MR = MC.

TEST II: Problem Solving

Beans Lingerie operates under monopolistic competition market structure. Beans sell its
products at Php 33.00 per unit. Since it has a considerable control over its price, it decided to lower
by Php 3.00 for every increase in output.

A. Complete the table and graph.

Total Total Total Marginal Marginal Marginal Average

Output Price Cost Revenue Profit Revenue Cost Profit Cost
(TC) (TR) (TP) (MR) (MC) (MP) (AC)
0 33.00 10 0 -10 - - - -
1 30.00 15 30 15 30 5 25 15
2 27.00 28 54 26 24 13 11 14
3 24.00 41 72 31 18 13 5 13.67
4 21.00 53 84 31 12 12 0 13.25
5 18.00 64 90 26 6 11 -5 12.8
6 15.00 82 90 8 0 18 -18 13.67
7 12.00 103 84 -19 -6 21 -27 14.71
8 9.00 170 72 -98 -12 67 -79 21.25
9 6.00 200 54 -146 -18 30 -48 22.22
Computation of PRICE, TR, TP, MR, MC and MP
DECREASED
Price x TC / NO. OF
BY 3 TR – TC = TP ∆TR / ∆Q = MR ∆TC / ∆Q = MC MR – MC = MP
Quantity = TR OUTPUT = AC
= PRICE
33 33 x 0 = 0 0 – 10 = -10 – – – –
33 – 3 = 30 30 x 1 = 30 30 – 15 = 15 30 - 0 / 1 = 30 15 - 10 / 1 = 5 30 – 5 = 25 15 / 1 = 15
30 – 3 = 27 27 x 2 = 54 54 – 28 = 26 54 - 30 / 1 = 24 28 - 15 / 1 = 13 24 – 13 = 11 28 / 2 = 14
27 – 3 = 24 24 x 3 = 72 72 – 41 = 31 72 - 54 / 1 = 18 41 - 28 / 1 = 13 18 – 13 = 5 41 / 3 = 13.67
24 – 3 = 21 21 x 4 = 84 84 – 53 = 31 84 - 72 / 1 = 12 53 - 41 / 1 = 12 12 – 12 = 0 53 / 4 = 13.25
21 – 3 = 18 18 x 5 = 90 90 – 64 = 26 90 - 84 / 1 = 6 64 - 53 / 1 = 11 6 – 11 = -5 64 / 5 = 12.8
18 – 3 = 15 15 x 6 = 90 90 – 82 = 8 90 - 90 / 1 = 0 82 - 64 / 1 = 18 0 – 18 = -18 82 / 6 = 13.67
15 – 3 = 12 12 x 7 = 84 84 – 103 = -19 84 - 90 / 1 = -6 103 - 82 / 1 = 21 -6 – 21 = -27 103 / 7 = 14.71
12 – 3 = 9 9 x 8 = 72 72 – 170 = -98 72 - 84 / 1 = -12 170 - 103 / 1 = 67 -12 – 67 = -79 170 / 8 = 21.25
9–3=6 6 x 9 = 54 54 – 200 = -146 54 - 72 / 1 = -18 200- 170 / 1 = 30 -18 – 30 = -48 200 / 9 = 22.22
B. Graph TR, TC and Total profits.
C. On a separate graph, plot MR, MC, AC and Marginal profits.

D. At what price and output should the firm sells its product? Why?
 Based on the table completed, it can be said that at output 3 or 4 at price of Php 24 and
Php 21 respectively, the firm can sell its product since it generates the maximum profit
under TR and TC approach. However, if the approach used was MR = MC, it can be said
that the firm can sell its product at output 4 with a price of Php 21 only because it
maximized the profit where the Marginal Revenue equals the Marginal Cost. Since
Beans Lingerie operates under monopolistic competition, equilibrium is attain where
MR = MC and that the price and output of the firm will be determined once that condition
will met since the firm faces downward sloping demand curve. In addition, if the price
continuously decreases as the output increases, the profit of the firm eventually
generates losses.