Total revenue will rise to 400040 400000 40 400040

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ue is $400,000, total cost is $320,000, and profit is $80,000. Now suppose it produces and sells an additional unit of a good. The additional revenue from selling this unit of the good (the marginal revenue) is $40, and the additional cost of producing this unit of the good (the marginal cost) is $10. Total revenue will rise to $400,040 ($400,000 $40 $400,040), and total cost will rise to $320,010 ($320,000 $10 $320,010). What will happen to profit? It will increase to $80,030 ($400,040 $320,010 $80,030). Thus, whenever the firm produces and sells an additional unit of a good and marginal revenue is greater than marginal cost, it is adding more to its total revenue than to its total cost, and therefore it is maximizing profit. How to Compute Profit and Loss When a firm computes its profit or loss, it determines total cost and total revenue and then finds the difference: 1. To compute total cost (TC), add fixed cost (FC) to variable cost (VC). TC FC VC e buy things from stores every day. Some of the businesses that own those stores earn more (per square foot of space and per store) than do others. Here is a list of wellknown businesses and the revenue that each earns per store and per square foot of space. Most of the dollar amounts are for 2003. W Revenue per square foot Revenue per store $379 $ 2,766,639 Nordstrom 319 37,112,273 Foot Locker 316 1,249,896 Wal-Mart 422 55,924,898 Target 278 32,942,045 Company Abercrombie and Fitch Sports Chalet 241 8,816,037 Barnes & Noble 243 5,865,314 Borders 237 6,000,000 Sharper Image 627 2,509,051 Radio Shack 342 829,841 Walgreens 709 7,748,507 Home Depot 370 40,144,000 Krispy Kreme 859 3,952,000 McDonald’s 543 1,628,000 Domino’s Pizza 527 605,879 Starbucks Coffee 521 781,669 Source: BizStats.com. 2. To compute total revenue (TR), multiply the price of the good (P) times the quantity of units (Q) of the good sold. P Q TR 3. To compute profit (or loss), subtract total cost (TC) from total revenue (TR). Profit (or loss) TR TC Suppose variable cost is $100 and fixed cost is $400. It follows that total cost is $500. Now suppose that 100 units of a good are sold at $7 each; total revenue is then $700. If we subtract total cost ($500) from total revenue ($700), we are left with a profit of $200. EXAMPLE: Section 3 Revenue and Its Applications 179 07 (154-185) EMC Chap 07 11/17/05 5:14 PM Page 180 How Many Workers Should the Firm Hire? Wal-Mart has more than 1 million employees. In fact, it has somewhere closer to 1.2 million employees. How does WalMart know how many employees to hire? Did the president of the company simply say one day, “1,199,278 employees sounds like the right number of employees to me, so let’s go with it”? We doubt it. The fact is, every business has to decide how many employees it will hire (just as we learned that every business “In the business world the has to decide how much it rearview mirror is always will produce). Let’s begin the clearer than the windshield.” story of how a firm decides —Warren Buffet how many employees to hire by first discussing the law of diminishing marginal returns. The name of this “economic law” sounds worse than it is. (If yo...
View Full Document

Ask a homework question - tutors are online