Question

The table below depicts the revenues and costs for some firm. Each row depicts a given level of sales and the associated total revenues and costs.

Units Sold	Total Revenues	Total Costs
0	0	200
1	600	650
2	780	710
3	850	780
4	890	870
5	910	980

what is the value of fixed costs?

what is the marginal cost of the 5th unit?

what is the marginal revenue of the 5th unit

what level of sales maximizes profits? 2 or 3 or 4 or 5?

Answer 1

1. Fixed cost is the cost of the fixed components of production like plants and machinery. Therefore, fixed cost is the total cost when the production level is 0. Here, fixed cost is $200.

2. Marginal cost of the 5th unit = Total cost of 5 units - Total cost of the first 4 units = $(980 - 870) = $110

3. Marginal revenue of the 5th unit = Total revenue of 5 units - Total revenue of the first 4 units = $(910 - 890) = $20

4. Profit is maximized when marginal revenue (MR) equals the marginal cost (MC). Let us calculate the MR and MC first:

Sold	Total Revenues	Marginal Revenue	Total Costs	Marginal Cost
0	0	-	200	-
1	600	600 – 0 = 600	650	650 –200 = 450
2	780	780 –600 = 180	710	710 –650 = 60
3	850	850 – 780 = 70	780	780 – 710 = 70
4	890	890 – 850 = 40	870	870 – 780 = 90
5	910	910 – 890 = 20	980	980 – 870 = 110

Here, marginal revenue equals marginal cost when 3 units are sold.