Subpart (a):
Revenues, costs and profits.
Subpart (a):
Explanation of Solution
Table -1 shows the total quantity and respective price level.
Table -1
Price | Quantity |
100 | 0 |
90 | 100,000 |
80 | 200,000 |
70 | 300,000 |
60 | 400,000 |
50 | 500,000 |
40 | 600,000 |
30 | 700,000 |
20 | 800,000 |
10 | 900,000 |
0 | 1,000,000 |
Total revenue can be calculated by using the following formula.
Substitute the respective values in Equation (1) to calculate the total revenue at price $90.
Total revenue is $9,000,000.
Total cost can be calculated by using the following formula.
Substitute the respective values in Equation (2) to calculate the total cost at quantity 100,000 units.
Total cost is $2,000,000.
Profit can be calculated by using the following formula.
Substitute the respective values in Equation (3) to calculate the profit for the quantity 100,000 units.
Profit is 7,000,000.
Table -2 shows the total revenue, total cost and profit that are obtained by using Equations (1), (2) and (3).
Table -2
Price | Quantity | Total revenue | Total cost | Profit |
100 | 0 | 0 | 2,000,000 | -2,000,000 |
90 | 100,000 | 9,000,000 | 3,000,000 | 6,000,000 |
80 | 200,000 | 16,000,000 | 4,000,000 | 12,000,000 |
70 | 300,000 | 21,000,000 | 5,000,000 | 16,000,000 |
60 | 400,000 | 24,000,000 | 6,000,000 | 18,000,000 |
50 | 500,000 | 25,000,000 | 7,000,000 | 18,000,000 |
40 | 600,000 | 24,000,000 | 8,000,000 | 16,000,000 |
30 | 700,000 | 21,000,000 | 9,000,000 | 12,000,000 |
20 | 800,000 | 16,000,000 | 10,000,000 | 6,000,000 |
10 | 900,000 | 9,000,000 | 11,000,000 | -2,000,000 |
0 | 1,000,000 | 0 | 12,000,000 | -12,000,000 |
The maximum profit of $18 million is obtained at a quantity of 500,000 at a price of $50. Thus, the equilibrium price is $560.
Concept introduction:
Profit: Profit refers to the excess revenue after subtracting the total cost from the total revenue.
Total revenue: Total revenue refers to the revenue of a firm through its total sale of goods.
Total cost: Total cost refers to the cost of all the inputs used by the firm. It includes both the fixed cost and the variable costs.
Subpart (b):
Calculate marginal revenue.
Subpart (b):
Explanation of Solution
Marginal revenue can be calculated as follows:
Substitute the respective values in equation (4) to calculate the marginal revenue at price level $60.
Marginal revenue is $30.
Table -3 shows the marginal revenue that obtained by using equation (4).
Table -3
Price | Quantity | Total revenue | Marginal revenue |
100 | 0 | 0 | - |
90 | 100,000 | 9,000,000 | $90 |
80 | 200,000 | 16,000,000 | 70 |
70 | 300,000 | 21,000,000 | 50 |
60 | 400,000 | 24,000,000 | 30 |
50 | 500,000 | 25,000,000 | 10 |
40 | 600,000 | 24,000,000 | -10 |
30 | 700,000 | 21,000,000 | -30 |
20 | 800,000 | 16,000,000 | -50 |
10 | 900,000 | 9,000,000 | -70 |
0 | 1,000,000 | 0 | -90 |
From table 4, it can be inferred that Marginal Revenue is less than price. Since the demand curve slopes downwards, Price declines when quantity rises. The marginal revenue declines even more than price because the firm loses revenue on all the units of the good sold when it lowers the price.
Concept introduction:
Marginal revenue: Marginal revenue refers to the amount of extra revenue attained in the process of increasing one more unit of output.
Subpart (c):
Profit maximization.
Subpart (c):
Explanation of Solution
Figure 1illustrates the
Figure 1 represents the marginal-revenue, marginal-cost, and demand curves. The horizontal axis represents the quantity and the vertical axis the prices, revenues and costs. The MR and MC curves cross between quantities of 400,000 and 500,000 which signify that the firm is maximizing profit in that region.
Concept introduction:
Marginal product of labor (MPL): Marginal product of labor refers to the additional output produced due to employing one more unit of labor.
Marginal product of capital (MPC): Marginal product of capital refers to the additional output produced due to employing one more unit of capital.
Profit maximization: A firm can maximize its profit at the point where its marginal revenue is equal to marginal cost.
Subpart (d):
Deadweight loss.
Subpart (d):
Explanation of Solution
The deadweight loss is depicted by area DWL in figure 1. Deadweight loss is greater in
Concept introduction:
Deadweight loss: Deadweight loss refers to loss of total economic benefit that arises due to the inefficient allocation of resource.
Subpart (e):
Change in profit.
Subpart (e):
Explanation of Solution
The price would not change if the author were paid $3 million instead of $2 million, the publisher since there would be no change in marginal cost or marginal revenue. The result would be a fall in the firm’s profit.
Concept introduction:
Profit: Profit refers to the excess revenue after subtracting the total cost from the total revenue.
Subpart (f):
Maximize economic efficiency.
Subpart (f):
Explanation of Solution
To maximize economic efficiency, the publisher would charge the price at $10 per book. This is because it is the marginal cost of the book. At price $10 per book, the publisher would receive negative profits equal to the amount paid to the author.
Concept introduction:
Economic efficiency: Economic efficiency is the situation where the economy is efficient. Which means that the marginal benefit from the last unit produced is equal to the marginal cost of production and the economic surplus will be at maximum.
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