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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

Johnny Rockabilly has just finished recording his latest CD. His record company’s marketing department determines that the demand for the CD is as follows:

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  The company can produce the CD with no fixed cost and a variable cost of $5 per CD.

a. Find total revenue for quantity equal to 10,000,20,000, and so on. What is the marginal revenue for each 10,000 increase in the quantity sold?

b. What quantity of CDs would maximize profit? What would the price be? What would the profit be?

c. If you were Johnny's agent, what recording fee would you advise johnny to demand from the record company? Why?

Subpart (a):

To determine
Calculate total revenue and marginal revenue.

Explanation

Table – 1 shows the schedule of market demand for the CD.

Table – 1

Price Quantity
24 10,000
22 20,000
20 30,000
18 40,000
16 50,000
14 60,000

Total revenue is calculated using the following formula:

Total Revenue=Price×Quantity (1)

Substitute the respective values in Equation (1) to calculate the total revenue at quantity of 10,000 units.

Total Revenue=Price×Quantity=24×10,000=240,000

Thus, total revenue is $240,000.

Marginal Revenue is calculated using the following formula:

Marginal Revenue=Total RevenuecurrentTotal RevenuePreviousQuantitycurrentQuantityprevious (2)

Substitute the respective values in Equation (2) to calculate the marginal revenue at the output level of 20,000 units

Subpart (b):

To determine
Total cost and marginal cost.

Subpart (c):

To determine
Recommended quantity.

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