Question

Essay: Do not add graphing.

1. Explain the concept of profit maximization when the marginal revenue equals marginal cost.

2. Differentiate: Average Fixed Cost, Average Variable Cost, and Average Total Cost.

3. Discuss the relationship between utility and price.

Answer 1

1. PROFIT MAXIMIZATION WHEN MARGINAL REVENUE EQUALS MARGINAL COST

• The profit maximization rules state that when the Marginal Cost (MC) is equal to the Marginal Revenue (MR) and the marginal cost is rising, then only the firm chooses its maximize its profit.
• Profit Maximation Formula- MC=MR.

Marginal Cost is the increase in cost when there is the production of more than one unit of product.

When the rate of sale changes by one unit, then there is a change in Total Revenue, and that change is called Marginal Revenue.

PROFIT = TOTAL REVENUE - TOTAL COST

• LIMITATION OF PROFIT MAXIMATION RULE (MC=MR)
• Real-World Data
• Competition
• Demand Factors
• Barriers to Entry

2. AVERAGE FIXED COST, AVERAGE VARIABLE COST, and AVERAGE TOTAL COST

AVERAGE FIXED COST is the fixed cost that doesn't change by some numbers of goods produced by the firm.

• Average Fixed Cost can be calculated by the fixed cost of production divided by the quantity of output produced.
• AVERAGE FIXED COST (AFC) = TOATAL FIXED COST (TFC) / OUPUT (Q)

AVERAGE VARIABLE COST is the variable cost of the company divided by the quantity of output (goods and services) produced. The Marginal Revenue is higher than the Average Variable Cost for the company to continue operating profitably over time.

• Average Variable Cost can be calculated by the variable cost of the company divided by the quantity of output produced.
• AVERAGE VARIABLE COST (AVC) = VARIABLE COST (VC) / QUANITY (Q).

AVERAGE TOTAL COST can be explained as the average cost which is also known as the unit cost of the firm which is equal to total cost divided by the numbers of units of goods and services produced by the firm. It also equals the sum of Average Total Cost as well as Average Variable Cost.

• AVERAGE COST (AC)= TOTAL COST (TC)  / NUMBERS OF UNITS OF GOODS PRODUCED (Q).

3. RELATIONSHIP BETWEEN UTILITY AND PRICE

• The price which a consumer willing to pay for consuming the goods and services depends on his/her Marginal utility which decreases with each additional unit of consumption.
• When consumption increases, the price of normal goods decreases.
• The standard rule is that the total utility is equal to the marginal utility change divided by the change in the cost of goods.
• Marginal utility = Totally utility difference / quantity of goods difference.