In a perfectly competitive market, the price remains constant regardless of the quantity sold. For instance, if the market price for wheat is set at $4 per bushel, this price will not fluctuate with changes in quantity. To understand the relationship between revenue, cost, and profit, we can analyze a simple numerical example.

Total revenue (TR) is calculated by multiplying the price (P) by the quantity (Q) sold. In this case, the total revenue for different quantities can be summarized as follows:

0 units: TR = 0 × 4 = $0
1 unit: TR = 1 × 4 = $4
2 units: TR = 2 × 4 = $8
3 units: TR = 3 × 4 = $12
4 units: TR = 4 × 4 = $16
5 units: TR = 5 × 4 = $20
6 units: TR = 6 × 4 = $24

Profit is determined by subtracting total costs (TC) from total revenue (TR). For example, if fixed costs are $2.50, the profit calculations for each quantity sold would be:

0 units: Profit = 0 - 2.50 = -$2.50
1 unit: Profit = 4 - 4.50 = -$0.50
2 units: Profit = 8 - 7 = $1
3 units: Profit = 12 - 10 = $2
4 units: Profit = 16 - 13.50 = $2.50
5 units: Profit = 20 - 18 = $2
6 units: Profit = 24 - 24 = $0

Marginal revenue (MR) is the additional revenue generated from selling one more unit. In a perfectly competitive market, MR remains constant and equals the price. Thus, for each additional unit sold, the marginal revenue is consistently $4:

From 0 to 1 unit: MR = 4
From 1 to 2 units: MR = 4
From 2 to 3 units: MR = 4
From 3 to 4 units: MR = 4
From 4 to 5 units: MR = 4
From 5 to 6 units: MR = 4

On the other hand, marginal cost (MC) reflects the change in total cost when production is increased by one unit. The marginal cost can vary and is typically increasing due to diminishing returns. For example:

From 0 to 1 unit: MC = 4.50 - 2.50 = $2
From 1 to 2 units: MC = 7 - 4.50 = $2.50
From 2 to 3 units: MC = 10 - 7 = $3
From 3 to 4 units: MC = 13.50 - 10 = $3.50
From 4 to 5 units: MC = 18 - 13.50 = $4.50
From 5 to 6 units: MC = 24 - 18 = $6

The change in profit can be calculated by comparing the profit at each level of output or by subtracting marginal cost from marginal revenue. The goal is to maximize profit, which occurs where the profit is highest. In this example, the maximum profit of $2.50 occurs when producing 4 units.

In summary, in a perfectly competitive market, marginal revenue remains constant and equals the price, while marginal cost typically increases with production. Understanding these concepts is crucial for determining the optimal level of output to maximize profit.

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