Marginal revenue product is defined as the change in total revenue that results
ID: 1189584 • Letter: M
Question
Marginal revenue product is defined as the change in total revenue that results from the employment of an additional unit of a resource. A producer wishes to determine how the addition of pounds of plastic will affect its MRP and profits. See the table below, and answer each of the questions.
Pounds of plastic (quantity of resource)
Number of assemblies (total product)
Price of assemblies ($)
0
0
-
1
15
13
2
30
11
3
40
9
4
55
7
5
58
5
a. The marginal product of the 3rd pound of plastic is ________.
b. The marginal revenue product of the 3rd pound of plastic is ______.
c. The price of plastic is $135 per pound. To maximize profit, the producer should produce
__________________.
d. The price of plastic is $135 per pound. To maximize profit, the producer should buy and use:
________________.
Pounds of plastic (quantity of resource)
Number of assemblies (total product)
Price of assemblies ($)
0
0
-
1
15
13
2
30
11
3
40
9
4
55
7
5
58
5
Explanation / Answer
(a) Calculate marginal product of 3rd pound of plastic -
MP = Total product of 3 pounds of plastic - Total product of 2 pounds of plastic
= 40 assemblies - 30 assemblies
= 10 assemblies
Thus, the marginal product of the 3rd pound of plastic is 10 assemblies.
(b) Calculate marginal revenue product of the 3rd pound of plastic -
First, we have to calculate the total revenue when 2 pounds of plastic is used -
Total Revenue (TR2) = Total product of 2 pounds of plastic * Price = 30 assemblies * $11/assembly = $330
Now, we will calculate the total revenue when 3 pounds of plastic is used -
Total Revenue (TR3) = Total product of 3 pounds of plastic * Price = 40 assemblies * $9/assembly = $360
Calculating marginal revenue product of 3rd pound of plastic -
MRP = (TR3 - TR2 )/ Q3 - Q2
MRP = ($360 - $330)/3 -2
MRP = $30
Thus, the marginal revenue product of the 3rd pound of plastic is $30.
(c) Marginal Cost is calculated as follows -
MC = TCn - TCn-1/Qn - Qn-1
Marginal Revnue is calculated as follows -
MR = TRn - TRn-1 / Qn - Qn-1
In the following table above mentioned formulas are used to calculate the marginal cost and marginal revenue columns respectively.
Required Table is as follows -
Pounds of Plastic (Q)
Total Cost (TC) of plastic ($)
(Price = 135/pound)
Total Product
Price
($)
Total Revenue
(TP*Price)
Marginal Cost
Marginal Revenue
0
0
0
-
0
0
0
1
135
15
13
195
135
195
2
270
30
11
330
135
135
3
405
40
9
360
135
30
4
540
55
7
385
135
25
5
675
58
5
290
135
-95
A firm maximizes its profit when it produce that output where its marginal revenue is equal to its marginal cost.
As above table shows that MR equals MC when 30 assemblies (Total Product column) are produced.
So, to maximize profit, producer should produce 30 assemblies.
(d) Marginal Cost is calculated as follows -
MC = TCn - TCn-1/Qn - Qn-1
Marginal Revnue is calculated as follows -
MR = TRn - TRn-1 / Qn - Qn-1
In the following table above mentioned formulas are used to calculate the marginal cost and marginal revenue columns respectively.
Required Table is as follows -
Pounds of Plastic (Q)
Total Cost (TC) of plastic ($)
(Price = 135/pound)
Total Product
Price
($)
Total Revenue
(TP*Price)
Marginal Cost
Marginal Revenue
0
0
0
-
0
0
0
1
135
15
13
195
135
195
2
270
30
11
330
135
135
3
405
40
9
360
135
30
4
540
55
7
385
135
25
5
675
58
5
290
135
-95
A firm maximizes its profit when it produced that output where its marginal revenue is equal to its marginal cost.
As above table shows that MR equals MC when 30 assemblies (Total Product column) are produced.
So, producer should produce 30 assemblies.
For producing 30 assemblies 2 pound of plastic is required.
So, to maximize profit, producer should buy and use 2 pounds of plastic.
Pounds of Plastic (Q)
Total Cost (TC) of plastic ($)
(Price = 135/pound)
Total Product
Price
($)
Total Revenue
(TP*Price)
Marginal Cost
Marginal Revenue
0
0
0
-
0
0
0
1
135
15
13
195
135
195
2
270
30
11
330
135
135
3
405
40
9
360
135
30
4
540
55
7
385
135
25
5
675
58
5
290
135
-95