Exploring Profit Maximizing Output 

2. Use the following table for the next four questions:

OUTPUT
TOTAL COST
MARGINAL REVENUE
Marginal Cost.
Total Revenue
Profit
0
$5
--
--

1 (first)
$9.00
$8.00

2 (second)
$13.00
$8.00

3 (third)
$17.00
$8.00

4 (fourth)
$22.50
$8.00

5 (fifth)
$30.00
$8.00

a) What is the marginal cost of the third unit of output? $

b) What is the average cost of four units of output? $

c) What is profit or loss when output is 4? $

d) Where are profits maximized?


 

3. The table of the reading (reproduced below) showed a seller maximizing profit at three units of output. Suppose that the government puts a price ceiling of $15 on this seller.

Computation of the Best Output for the Firm
(1)
Output
(2)
Total Cost
(3)
Price (that people
are willing to pay)
(4)
Total Revenue
(5)
Which Output
(5)
Marginal Revenue
(6)
Marginal Cost
0
$10
--
--

--
--
1
$20
$18
$
First
$
$10
2
$31
$17
$
Second
$
$11
3
$43
$16
$
Third
$
$12
4
$56
$15
$
Fourth
$
$13
5
$70
$14
$
Fifth
$
$14
6
$85
$13
$
Sixth
$
$15

a) Recompute the total revenue and marginal revenue columns of the table. (Hint: What is the highest price the seller can charge if it sells only one unit? If it sells six units? Be careful.)

What is the profit-maximizing level of output with the price ceiling?

c) Using supply and demand curves, we showed that price ceilings reduced output. However, the price ceiling in this problem is not reducing output. What is going on? (Hint: Check the section on supply and demand for assumptions on the number of buyers and sellers needed for supply and demand curves.)

 


4. a) Suppose there are 30 people in a room with the average age of 40 years. A 15-year-old boy walks in and the average age of the group becomes 40.5. Is this possible?
b) A firm is producing 30 units of output at an average cost of $40. Adding another unit will increase costs by $15 (this is the marginal cost) and the average cost will rise to $40.5. Is this possible?
c) If average cost is falling, what must be true of marginal cost?


Review Question back Next