Exam #3 Cheat Sheet

Exam #3 Cheat Sheet - Cost and revenue tables and...

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Cost and revenue tables and profit-max decisions Example. Flintstone Gadgets. The price is \$38. P Q TR TC MC Profit Relevant formulas 38 4 152 110 25 42 TR = P x Q 38 5 190 140 30 50 TC (n) = TC (n-1) + MC (n) 38 6 228 175 35 53 MC (n) = TC (n) - TC (n-1) 38 7 266 215 40 51 Profit = TR - TC (Profit Max) 38 8 304 260 45 44 A second method of determining a firm’s profit-max level of output is to find the highest level of output at which MC ≤ P. We know from 7b this is the profit-max level of output. Problem. Use marginal cost method to determine the profit-max output level for Flintstone Gadgets. Then use profit formula for determining what the highest level of profits is. Solution. The price is \$38 . The highest level of output at which MC ≤ P (\$38 ) is6 . Hence the profit-max level of output is \$35 . (#6) Profits at output of 6 = TR ( 6 ) - TC ( 6 ) = 228 - 175 = 53 . 8e. change in profit when one more unit is produced = P - MC. Hence change in profit = P - MC (8) = \$38 - \$45 = -\$7 (LOSING \$7) ATC=TC/Q // Firms earns profit if ATC is < than profits. Firm loses if ATC is > than price. Break-even point P=ATC. Break-even point diagram for PC firm P ATC loss loss Output of 16 results in profit (P > ATC) 50 A B D Output of 20 is breakeven point (P = ATC) (neither profit nor loss) profit Output of 24 results in loss (P < ATC) 8 16 20 24 Q 9e. Break-even point diagram problem.. Draw diagram showing that with price at \$350, the break-even points for a firm occur at output levels of 20 and 40. After you draw the diagram, use it to determine whether firm would be operating at profit or loss at outputs of 15, 35 and 55. P Output of 15 results in ____________ (profit or loss) Out put of 35 results in ___________ (profit or loss) Output of 45 results in ____________ (profit or loss) Q

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10a. Cost, revenue and profit problem. A firm produced 10 units at a total cost of \$170 and sold them all \$20 each. Use relevant formulas to calculate the firm’s total revenue, total profit, and profit per unit. (Hint: use formulas 1-2-3) Total revenue = price x quantity TR = P x Q = (\$20)(10)= \$200 Total profit = total revenue - total cost TP = TR – TC = \$200 - \$170 = \$30 Profit per unit = total profit/quantity PPU = TP/Q = \$30/\$10 = \$3 10b. Cost, revenue and profit problem. A firm produced 20 units at a total cost of \$520 and sold them for \$30 each. Use relevant formulas to calculate the firm’s average total cost, profit per unit, and total profit. (Hint: use formulas 4-5-6) Average total cost = total cost/quantity ATC = TC/Q = \$520/20 = 26 Profit per unit = price - average total cost PPU = P - ATC = \$30 - \$26 = \$4 Total profit = quantity x profit per unit TP = Q x PPU = (20)(\$4) = \$80 11. Profit box diagrams for pure competition. P MC = S ATC Market price = \$22 MC for firm reaches \$22 at Q = 90 22 E D At Q = 90, ATC = \$19 Profit box 19 Hence profit max Q = 90 Profit per unit = \$22 - \$19 = \$3 Total profit = 90 x \$3 = \$270 90 Q Area = Total Profit (TP) Height = Profit per unit (PPU) 1. has 3 curves: MC, ATC and horizontal demand curve at market determined price 2. firm will maximize profits by producing at point E (where MC intersects demand curve)
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