1) Consider total cost and total revenue given in the table below:
Quantity
0
1
2
3
4
5
Total Cost
$8
9
10
11
13
19
Total Revenue
$0
8
16
24
32
40
6
27
48
7
37
56
a) Calculate profit for each quantity. How much should the firm produce to
maximize profit?
b) Calculate marginal revenue and marginal cost for each quantity. Graph them.
c) At what quantity do these curves cross? How does this relate to your answer to
part a)?
d) Can you tell whether this firm is in a competitive industry? If so, can you tell
whether the industry is in a long-run equilibrium?
2) Universities offer summer classes for a variety of reasons. I hope when my university
offers a class in the summer that the people doing the planning are thinking
economically. The university has a fixed plant that will sit idle if it is not used in the
summer. The university thus shouldn’t worry about the fixed cost of the buildings, but
variable costs are still important. The professor’s salary and fringe benefits are extra
costs that wouldn’t be incurred if he or she were not teaching the course. The building
must be cooled, and lighting must be provided. Also, the extra cost of registering the
students for the summer must be paid. If the tuition payments of the students who signed
up for a summer class don’t cover these variable costs, the university should think
carefully about whether to offer the course. If it offers the course at a tuition that doesn’t
even cover variable cost, the university is choosing to subsidize students to attend
summer school.
Now, say the professor’s salary and benefits for teaching the course are $5,000, the extra
electricity for air-conditioning and lighting costs $500, and the extra cost of registering
the students in the class is $50. How much tuition revenue will have to be received to
justify offering the course? I summer tuition charges per course are $1000 at WSU, how
many students need to sign up for the course to make it worthwhile for WSU to offer it?
Answer Key
1) Consider total cost and total revenue given in the table below:
Quantity
Total Cost
Total Revenue
0
$8
$0
1
9
8
2
10
16
3
11
24
4
13
32
5
19
40
6
27
48
7
37
56
a) Calculate profit for each quantity. How much should the firm produce to
maximize profit?
The firm should produce 5 or 6 units to maximize profit since TR – TC is largest (4019=21, 48-27=21) at both 5 and 6.
b) Calculate marginal revenue and marginal cost for each quantity. Graph them.
Figure 6
c) At what quantity do these curves cross? How does this relate to your answer to
part a)?
Marginal revenue and marginal cost are graphed in Figure 6. The curves cross at a
quantity between 5 and 6 units, yielding the same answer as in part a).
d) Can you tell whether this firm is in a competitive industry? If so, can you tell
whether the industry is in a long-run equilibrium?
This industry is competitive since marginal revenue is the same for each quantity. The
industry is not in long-run equilibrium, since profit is positive.
Here’s the table showing costs, revenues, and profits:
Quantity
Total Cost
0
1
2
3
4
5
6
7
$8
9
10
11
13
19
27
37
Marginal
Cost
--$1
1
1
2
6
8
10
Total
Revenue
$0
8
16
24
32
40
48
56
Marginal
Revenue
--$8
8
8
8
8
8
8
Profit
$ -8
-1
6
13
19
21
21
19
2) Now, say the professor’s salary and benefits for teaching the course are $5,000, the
extra electricity for air-conditioning and lighting costs $500, and the extra cost of
registering the students in the class is $50. How much tuition revenue will have to be
received to justify offering the course? I summer tuition charges per course are $1000 at
WSU, how many students need to sign up for the course to make it worthwhile for WSU
to offer it?
The fixed costs are $5000 for the teacher (who gets paid that no matter how many
students take the class) and $500 for lighting (which costs that no matter how many
students take the class). The variable cost is the cost of registering each student.
TC = FC + VC
= (5000 + 500) + 50S where S is the number of students.
TR = PQ
= 1000S since the price of tuition is $1000 per student and Q=S is the number of
students.
WSU offers the class if TR>TC. What is the minimum number of students to make this
true?
1000S = 5000 + 500 + 50S
1000S = 5500 + 50S
950S = 5500
S = 5.78.
So we need ATLEAST 6 students to take the class. Note that it is official WSU policy
that a scheduled class be cancelled if there are not atleast 6 students that register.