Question

In: Economics

Suppose that you produce and sell children's tables in a local market. Past experience enables you...

Suppose that you produce and sell children's tables in a local market. Past experience enables you to estimate your demand and marginal cost schedules. This information is presented in the accompanying table.

Complete the following table by computing the total cost of producing each quantity. Then, compute the total revenue earned at each price level and the marginal revenue earned at each price level.

Price

Quantity Demanded

Fixed Cost

Total Cost

Marginal Cost

Total Revenue

Marginal Revenue

($ per table)

(Tables per Week)

($)

($)

($)

($)

($)

40 1 40 65
5
35 2 40
11
30 3 40
18
25 4 40
26
20 5 40
35
15 6 40

Assuming you are currently charging $25 per table set, what should you do if you want to increase profits?

Increase the price

Leave the price unchanged

Decrease the price

Given your demand and cost estimates, you should charge a price of    if you want to maximize your weekly profit. At this price, your output will be

tables, and you will earn a weekly profit of

.

Solutions

Expert Solution

Ans:

Price
( $ per table)
Quantity
Demanded
( Tables per week)
Fixed Cost
( $ )
Total Cost
( $ )
Marginal Cost
( $ )
Total
Revenue
( $)
Marginal
Revenue
( $)
40 1 40 65 -- 40 --
35 2 40 70 5 70 30
30 3 40 81 11 90 20
25 4 40 99 18 100 10
20 5 40 125 26 100 0
15 6 40 160 35 90 -10

Explanation:

Marginal cost = Change in total cost / change in quantity

Total revenue = Price * Quantity

Marginal Revenue = Change in total revenue / Change in Quantity

Ans: Assuming you are currently charging $25 per table set, you  should increase the price if you want to increase profits.

Ans: Given your demand and cost estimates, you should charge a price of $30 if you want to maximize your weekly profit. At this price, your output will be 4 tables, and you will earn a weekly profit of $9.

Explanation:

Price
( $ per table)
Quantity
Demanded
( Tables per week)
Fixed Cost
( $ )
Total Cost
( $ )
Marginal Cost
( $ )
Total
Revenue
( $)
Marginal
Revenue
( $)
Profit
( $)
40 1 40 65 -- 40 -- -25
35 2 40 70 5 70 30 0
30 3 40 81 11 90 20 9
25 4 40 99 18 100 10 1
20 5 40 125 26 100 0 -25
15 6 40 160 35 90 -10 -70

Profit = Total revenue - Total cost

Under monopolistic competition , the profit maximization condition is where MR = MC or MR > MC


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