module 53 Profit Maximization 541
Section(^10)
(^) Behind
(^) the
(^) Supply
(^) Curve:
(^) Profit,
(^) Production,
(^) and
(^) Costs
Tackle the Test: Free-Response Questions
- Use the data in the table provided.
Quantity Total Revenue Total Cost
QTRTC
0$0$ 7
11823
23629
35437
47249
59065
6 108 87
7 126 112
a. What is the marginal revenue of the fourth unit?
b. Calculate profit at a quantity of two. Explain how you
calculated the profit.
c. What is the profit-maximizing level of output? Explain how
to use the optimal output rule to determine the
profit-maximizing level of output.
Answer (5 points)
1 point:$18
1 point:$7
1 point:$36−$29 or TR −TC
1 point: 5 units
1 point:The optimal output rule states that profit is maximized when MC=MR.
Here, MCnever exactly equals MR.When this occurs, the firm should produce
the largest quantity at which MRexceedsMC.At a quantity of 5, MC=$16 and
MR=$18. For the sixth unit, MC=$22 and MR=$18, and because MC> MR,
the sixth unit would add more to total cost than it would to total revenue, and it
therefore should not be produced.
- Use a graph to illustrate the typical shape of the two curves
used to find a firm’s profit-maximizing level of output on
the basis of the optimal output rule. Assume all units of
output can be sold for $5. Indicate the profit-maximizing
level of output with a “Q*” on the appropriate axis. (You
don’t have enough information to provide a specific
numerical answer.)