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Chapter 8: Q.39 (page 213)

The AAA Aquarium Co. sells aquariums for \(20 each. Fixed costs of production are \)20. The total variable costs are \(20 for one aquarium, \)25 for two units, \(35 for the three units, \)50 for four units, and $80 for five units. In the form of a table, calculate total revenue, marginal revenue, total cost, and marginal cost for each output level (one to five units). What is the profit-maximizing quantity of output? On one diagram, sketch the total revenue and total cost curves. On another diagram, sketch the marginal revenue and marginal cost curves.

Short Answer

Expert verified

The profit-maximizing point is where MC=MR. From the table, it should produce 4units.

Step by step solution

01

Defination

Marginal Revenue and Marginal Cost: Marginal revenue is the amount of money a company makes from selling an extra unit of a product or service. The marginal cost, on the other hand, is the increase in total cost when a firm increases total production by one unit.

02

Calculation

By comparing TC to TR it can be observed that at low quantities total cost is higher, however, it dips down for quantities 3 and 4, which turn a profit, and quantity 5 jumps in marginal cost making it unprofitable.

03

Calculation

The profit-maximizing point is where MC=MR. From the table, it should produce 4units.

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Most popular questions from this chapter

Firms in a perfectly competitive market are said to be 鈥減rice takers鈥濃�攖hat is, once the market determines an equilibrium price for the product, firms must accept this price. If you sell a product in a perfectly competitive market, but you are not happy with its price, would you raise the price, even by a cent?

Assuming that the market for cigarettes is in perfect competition, what does allocative and productive efficiency imply in this case? What does it not imply?

A market in perfect competition is in long-run equilibrium. What happens to the market if labor unions are able to increase wages for workers?

Suppose that the market price increases to $6, as Table 8.14 shows. What would happen to the profit-maximizing output level?

1. A computer company produces affordable, easy-to-use home computer systems and has fixed costs of \(250. The marginal cost of producing computers is \)700 for the first computer, \(250 for the second, \)300 for the third, \(350 for the fourth, \)400 for the fifth, \(450 for the sixth, and \)500 for the seventh.

a. Create a table that shows the company鈥檚 output, total cost, marginal cost, average cost, variable cost, and average variable cost.

b. At what price is the zero-profit point? At what price is the shutdown point?

c. If the company sells the computers for \(500, is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVC curves to illustrate your answer and show the profit or loss.

d. If the firm sells the computers for \)300, is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVC curves to illustrate your answer and show the profit or loss.
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