Question

Refer to the table to answer questions 1-3.  

Units	TR	TC	MC	MR	Profit
0		20
1		30
2		35
3		45
4		60
5		90
6		130

1. Fill in the TR, MC, and MR columns in the table if the price of the product is $20.
2. What is the optimal output rule used to maximize a firm’s profit?
3. What level of output will maximize this firm’s profit?  Use marginal analysis to explain (you can check your answer using the profit column in the table).

Use the following table to answer questions 4-6.

Quantity	Total Cost	MC	MR
0	30
1	40
2	45
3	60
4	80
5	110

4. Fill in the MC and MR columns if the price of the product is $25.
5. Use the optimum output (profit maximization) rule to determine the profit-maximizing output and the firm’s profit at that level of output.
6. Calculate the firm’s profit if they produce one more unit of output than you determined in question 5. Use marginal analysis to explain what happens to profit when the firm produces one more.

Answer 1

(1)

Units	TR	TC	MC	MR	Profit
0	0	20	----	----	-20
1	20	30	10	20	-10
2	40	35	5	20	5
3	60	45	10	20	15
4	80	60	15	20	20
5	100	90	30	20	10
6	120	130	40	20	-10

TR = Price * Quantity

MC = Change in TC / Change in Quantity

MR = Change in TR / Change in Quantity

Profit = TR - TC

(2) A firm produces till the MR is greater than MC or firm achieve a point where MR = MC in order to maximize profit.

(3) 4 units of output maximize the profit.

Till 4 unit of output, MR is higher than MC.

(4)

Quantity	Total cost	MC	TR	MR
0	30	---	0	----
1	40	10	25	25
2	45	5	50	25
3	60	15	75	25
4	80	20	100	25
5	110	30	125	25

TR = Price * Quantity

MC = Change in TC / Change in Quantity

MR = Change in TR / Change in Quantity

(5) Till 4 units of output MR is greater than MC. Hence, the profit maximization level of output is 4 units.

Profit = TR - TC

Profit = 100 - 80 = 20.

Profit at 4 units of output is $20.

(6) Profit at 5th units of output = TR - TC = 125 - 110 = $15.

At 5th unit of output MR is less than the MC. Hence, the profit will fall if 5th unit of output produces.