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The document provides the demand and cost functions for a firm and asks to calculate the output level (Q) that maximizes total revenue and profits. For total revenue, the marginal revenue function is set equal to 0, yielding an output of Q = 24. For profits, the marginal cost function is set equal to the marginal revenue function and solved, giving two possible solutions for Q of 1 or 4 units. However, the price at Q=4 is higher so profits would be maximized at an output of 4 units.

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23 views

Answer

The document provides the demand and cost functions for a firm and asks to calculate the output level (Q) that maximizes total revenue and profits. For total revenue, the marginal revenue function is set equal to 0, yielding an output of Q = 24. For profits, the marginal cost function is set equal to the marginal revenue function and solved, giving two possible solutions for Q of 1 or 4 units. However, the price at Q=4 is higher so profits would be maximized at an output of 4 units.

Uploaded by

wasithejammy
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Q. Given a firm’s demand function, P = 24 - 0.

5Q and the average cost


function, AC = Q2 – 8Q + 36 + 3/Q, calculate the level of output Q which
 
a) maximizes total revenue
b) maximizes profits

Demand Curve Function: P = 24 – 0.5Q

Total Revenue Function: P*Q

 TR = (24 – 0.5Q) Q
 TR = 24Q – 0.5Q2

Marginal Revenue Function: First Derivative of Total Revenue Function

 MR = 24 – Q

a. Maximum Revenue

MR = 0
 24 – Q = 0
 Q = 24
 P = 24 – 0.5 ( 24)
 P = 12

So for ` 12 and Q = 24 units , Revenue will be maximized.

b. Maximum Profit

Average Cost Function: AC = Q2 – 8Q + 36 + 3/Q

Total Cost Function : AC * Q


 TC = ( Q2 – 8Q + 36 + 3/Q ) Q
 TC = Q3 – 8Q2 + 36Q + 3

Marginal Cost : First Derivative of Total Cost Function

 MC = 3Q2 – 16 Q + 36

Profit is maximized when, MC = MR

 3Q2 – 16 Q + 36 = 24 – Q
 Q = 1 or Q= 4
 Two Cases
 A. When Q = 1 , P =24 – 0.5 * 1 = ` 23.50
 B. When Q = 4 , P = 24 – 0.5 * 4 = ` 22.00

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