# Chapter2 - 6005 Homework Chapter 2 P2.1 Graphic Analysis A...

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1 6005 Homework – Chapter 2 P2.1 Graphic Analysis A. Given the output (Q) and price (P) data in the following table, calculate the related total revenue (TR), marginal revenue (MR), and average revenue (AR) figures: (Con’t Next Page)

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2 Q P TR MR AR 0 \$10 1 9 2 8 3 7 4 6 5 5 6 4 7 3 8 2 9 1 10 0 B. Graph these data using "dollars" on the vertical axis and "quantity" on the horizontal axis. At what output level is revenue maximized? C. Why is marginal revenue less than average revenue at each price level? P2.1 SOLUTION A. Q P TR=P Η Q MR= Μ TR/ Μ Q AR = TR/Q = P 0 \$10 \$ 0 -- -- 1 9 9 \$9 \$9 2 8 16 7 8 3 7 21 5 7 4 6 24 3 6 5 5 25 1 5 6 4 24 -1 4 7 3 21 -3 3 8 2 16 -5 2 9 1 9 -7 1 10 0 0 -9 0 B. If production of partial units is not possible, revenue is maximized at an output level of Q = 5 because MR switches from positive to negative at Q = 6.
3 C. At every price level, price must be cut by \$1 in order to increase sales by an additional unit. This means that the "benefit" of added sales from new customers is only gained at the "cost" of some loss in revenue from current customers. Thus, the net increase in revenue from added sales is always less than the change in gross revenue. Therefore, marginal revenue is always less than average revenue (or price).

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4 P2.5 Marginal Analysis: Tables . Climate Control Devices, Inc., estimates that sales of defective thermostats cost the firm an average of \$25 each for replacement or repair. An independent engineering consultant has recommended hiring quality control inspectors so that defective thermostats can be identified and corrected before shipping. The following schedule shows the expected relation between the number of
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## This note was uploaded on 11/13/2011 for the course MIS 4100 taught by Professor Maxnorth during the Spring '11 term at Birmingham-Southern College.

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Chapter2 - 6005 Homework Chapter 2 P2.1 Graphic Analysis A...

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