Theory question 102
Theory of Costs and RevenueSection A: answer one question only from this section.
Table of a Firm's Total Revenue and Costs
Quantity of yams (kg): 0, 1, 2, 3, 4, 5, 6, 7, 8
Total revenue (TR) N: 0, 9, 18, 24, 28, 30, P, 28, 24
Marginal revenue (MR) N: –, 9, 9, 6, Q, 2, 1, −3, R
Total cost (TC) N: 5, 8, 16, 21, 25, 25, 25, S, 24
Marginal cost (MC) N: –, 3, T, 5, 4, U, 0, 1, −2
Use the table above to answer the following questions (a) Complete the table by calculating the missing figures P.Q.R.S.T.U. (b) At what output is profit maximised? (c) Calculate the profit when quantity sold is 5 (d) At what output does MC begin to rise?
Show the model answer
(a) MR = change in TR; MC = change in TC
P = 30 + 1 = N31
Q = 28 − 24 = N4
R = 24 − 28 = −N4
S = 25 + 1 = N26
T = 16 − 8 = N8
U = 25 − 25 = N0
(b) Profit = TR − TC at each output: −5, 1, 2, 3, 3, 5, 6, 2, 0
MR = MC (N4) at 4 kg, but MC is falling there; profit is greatest (N6) at 6 kg (TR N31 − TC N25)
(c) Profit at 5 kg = TR − TC = N30 − N25 = N5
(d) MC first rises after the 1st kg (from N3 to N8 at 2 kg); after falling, it rises again after 6 kg (from N0 to N1 at 7 kg)
Work out MR and MC as differences between successive totals; profit is TR minus TC.