Tom Railbon is an artist. He has a particular piece of sculpture that he makes a
ID: 1117957 • Letter: T
Question
Tom Railbon is an artist. He has a particular piece of sculpture that he makes and sells at local art fairs. He sells the sculpture for $220. Recently he decided it was time to actually do an economic analysis of his business to see how many pieces he should sell to maximize his profit. He came up with the following analysis of his costs:
Quantity Total Variable Cost
1 $200
2 $380
3 $540
4 $720
5 $920
6 $1,170
7 $1,470
In addition to the variable costs, he also figures he has $100 in fixed costs. Using that information complete the following table:
Quantity Total Variable Cost Total Cost Marginal Cost Total Revenue Marginal Revenue
1 $200
2 $380
3 $540
4 $720
5 $920
6 $1,170
7 $1,470
Now, using the Marginal Cost and Marginal Revenue, explain what quantity Tom should produce to maximize his profit.
Explanation / Answer
Ans:
Total cost = Variable cost + fixed cost
Marginal cost is the additional cost of producing an additional unit of output.
Marginal revenue is the additional revenue from sale of an additional unit of output.
Total revenue = Quantity * price@$220
Table
The profit maximizing output is 5 units. At 5 units of output Tom will maximize his profit.
Quantity Total variable cost($) Fixed cost($) Total cost($) Marginal cost($) Total revenue($) Marginal revenue($) 1 $200 $100 $300 $300 $220 $220 2 $380 $100 $480 $180 $440 $220 3 $540 $100 $640 $160 $660 $220 4 $720 $100 $820 $180 $880 $220 5 $920 $100 $1020 $200 $1100 $220 6 $1170 $100 $1270 $250 $1320 $220 7 $1470 $100 $1570 $300 $1540 $220