19. Profits in Excel
1. Use an excel spreadsheet to calculate the profit maximizing output as well as the price, profits, and
assorted cost and revenue statistics. Build a schedule showing revenue, cost, profit, price, marginal
revenue, marginal cost, average cost and average variable cost. Then graph these items.
Profit on the Spreadsheet
It is especially interesting to look at quantity, total costs,
revenue, and profit together as well as quantity with price, marginal
revenue, marginal cost, average variable cost and average cost. To put
all of these things on a separate page of a spreadsheet, simply type in
“=” go to the sheet where the appropriate function has been placed and
hit enter.
Then copy and past. Easier still is to use the mouse on
the bottom left corner and drag over.
Important functions to place on the profit sheet would be the price
function, total cost function, marginal revenue function, and marginal
cost function.
How to put the price function on the profit page?
Type “equal”
and go to the sheet where you have demand and revenue information.
Use your mouse to click on the P = and then hit enter.
Go back to the
new profit sheet. Put your mouse on the lower left corner and drag
over three cells.
The profit function should appear.
Do this with
the other functions.
Calculating the Profit Maximum
Using the spreadsheet to calculate the profit maximizing output is
simple.
Just think about the algebraic solution for MC = MR.
For
example, suppose:
MR = 3523 - .1Q
MC = .4Q
Q = 3523/(.4 - -.1)
Don’t type in these numbers, use your mouse to select the cells that
include those numbers.
To find total cost and price, just use the functions above and the
quantity you have calculated.
Don’t type in the numbers, use the
mouse to select the numbers.
As for revenue, multiply price and
quantity.
Profit—revenue minus quantity. Variable cost is total cost
minus fixed cost (the first term in the cost function.
Average cost
and average variable cost are found by taking total cost and variable
cost and dividing by quantity.
IMPORTANT:
If you change your demand function, the factors
influencing demand like advertising or income, or your cost function,
the figures above should immediately and automatically change to
reflect the new information.
Building the Schedules
Putting the various schedules on the profit schedule is simple.
Type in “=” and then select the label of the quantity, like Q for
quantity on the revenue sheet.
Hit enter.
Then back on the profit
sheet you should see a Q. Put you mouse on the lower right hand corner
and drag on down fifty cells. You should have the same list of
quantities that you have on the revenue sheet.
Do the same for revenue and total cost.
To find profit, type in
the heading profit and then in the cell below, take the first revenue
and subtract the first total cost.
Price, marginal cost, marginal
revenue can be done the same way.
Average cost and average variable
cost can each be found on one of the other sheets or else calculated as
you prefer.
Graphing
Use chart wizard.
Generally, you will want to graph quantity,
revenue, total cost, and profit.
And then also graph quantity, price,
marginal revenue, marginal cost, average cost, and average variable
cost.
Type a title and provide horizontal gridlines.
its own page.
Put the chart on
To print out the graph for total cost, revenue and profit, you
will need to go to the revenue sheet and change the increment by which
quantity increases so that you show all the quantities that allow for
profit.
You should see the football.
To print out the graph from price, marginal revenue, marginal
cost, average cost, and average variable cost, you need to do three
things. You should start at one instead of zero. That’s because the
graph represents “divided by zero” as zero—which is wrong.
You also
need to adjust the scale of the “y” axis.
Click right on that axis
and go to scale.
The minimum should be zero and the maximum needs to
be reduced—exactly where depends on the numbers you are working upon.
Reduce it until the profit maximizing price and quantity becomes
apparent. Similarly, you must adjust the increment by which quantity
increases until it looks right.