Unformatted text preview: revenue and marginal cost, first identify any
positive sales quantities at which marginal revenue equals marginal cost. Then check whether the most
profitable positive sales quantity results in greater profit than shutting down. If it does, that is the profit
maximizing choice. If not, then selling nothing is the best option. In this example, the pricetaking firm will
maximize profit by producing the quantity where price (or marginal revenue) equals marginal cost: 729 = 9Q2 81 = Q2 Q = 9 units.
If the firm shuts down, then it incurs a fixed cost of $1,000. Because revenue (P × Q = 729(9) = 6,561) is
greater than the variable cost of production (3Q3 = 3(9)3 = 2,187), the firm should not shut down.
Next, suppose the fixed cost is avoidable by shutting down. When producing optimally, profit equals: π = P × Q – 3Q3 – 1,000 π = 729(9) – 3(9)3 – 1,000 π = 6,561 – 2,187 – 1,000 π = $3,374.
If the fixed cost is avoidable, then shutting down results in a profit of zero. Therefore, the firm should continue
producing. That is, the firm should produce 9 units. 8. awar d: 4 out of
4.00 points Noah and Naomi can produce garden benches, garden chairs or both; they are price takers in both markets.
Their cost function for garden benches is and the marginal cost is Their cost function for garden chairs is and the marginal cost is The price of a garden bench, PB, is $120. The price of a garden chair, PC, is $90. e z to.mhe c loud.mc gr a w- hill.c om/hm.tpx? todo= pr intvie w 3/14 1/15/14 Assignme nt Pr int Vie w a. What are Noah and Naomi's profitmaximizing sales quantities of benches and chairs? Instructions: Round your answers to 1 decimal place. 35 0 benches. chairs. b. What is the profitmaximizing quantities if the price of benches increase...
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This note was uploaded on 01/22/2014 for the course ECO 3352 taught by Professor Ax during the Fall '13 term at Troy.
- Fall '13