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Practice Questions 6 (Unit 7) Solutions

The document outlines the process of finding and verifying the maximum profit for a firm using its profit function, resulting in a critical point at Q = 20. It also discusses the relationship between marginal revenue and marginal cost, confirming that they are equal at the profit-maximizing quantity. Additionally, it provides examples of profit calculations and critical points for different functions.

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Maxim Ryan
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17 views2 pages

Practice Questions 6 (Unit 7) Solutions

The document outlines the process of finding and verifying the maximum profit for a firm using its profit function, resulting in a critical point at Q = 20. It also discusses the relationship between marginal revenue and marginal cost, confirming that they are equal at the profit-maximizing quantity. Additionally, it provides examples of profit calculations and critical points for different functions.

Uploaded by

Maxim Ryan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Practice Questions 6 (Unit 7)

1. The profit function is given by


𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑇𝑅 − 𝑇𝐶 = −2𝑄 3 − 30𝑄 2 + 3600𝑄 − 5000
Step 1 – find the critical/stationary points of the profit function, that is, the
points that satisfy:
𝑑𝑃𝑟𝑜𝑓𝑖𝑡
=0
𝑑𝑄
Differentiating the profit function, we get:
𝑑𝑝𝑟𝑜𝑓𝑖𝑡
= −6𝑄 2 − 60𝑄 + 3600
𝑑𝑄

Using either factorisation to solve or the quadratic equation, we get:


𝑑𝑝𝑟𝑜𝑓𝑖𝑡
= −6𝑄 2 − 60𝑄 + 3600 = 0 if 𝑄 = −30 𝑜𝑟 𝑄 = 20
𝑑𝑄

However, the question stated that the profit function is only defined at 𝑄 > 0, so
our only valid critical value or stationary point is 𝑄 = 20

Step 2: verify that 𝑄 = 20 is indeed a max. Hence we need to use the second
derivative
𝑑2 𝑝𝑟𝑜𝑓𝑖𝑡
= −12𝑄 − 60
𝑑𝑄 2
𝑑2 𝑝𝑟𝑜𝑓𝑖𝑡
When 𝑄 = 20, = −240 − 60 = −300 < 0
𝑑𝑄 2

Hence, a max occurs when 𝑄 = 20. Therefore, the profit of this firm is
maximized when 𝑄 = 20

2. The marginal revenue is just the first derivative of the total revenue function and
the marginal cost is just the first derivative of the total cost function

𝑀𝑅 = 4000 − 66𝑄
𝑀𝐶 = 6𝑄 2 − 6𝑄 + 400

At 𝑄 = 20, 𝑀𝑅 = 4000 − 66(20) = 2680


At 𝑄 = 20, 𝑀𝑅 = 6(202 ) − 6(20) + 400 = 2680
Thus, when 𝑄 = 20; 𝑀𝑅 = 𝑀𝐶 = 2680. Note, this is an important principle in
economics – the quantity Q that maximizes profits usually occurs where
marginal revenue = marginal cost!

3.
a. Profit found by 𝑇𝑅 − 𝑇𝐶 = −2𝑥 2 + 16𝑥 − 14
b. Critical point: 𝑥 = 4; Use second derivative to verify a max. Second
derivative is −4 < 0, so a max at 𝑥 = 4
c. Profits at 𝑥 = 4 is 18
d. 𝑀𝑅 = 19 − 4𝑥
e. 𝑀𝐶 = 3
f. Set 𝑀𝑅 = 𝑀𝐶 and solve for 𝑥. We get 𝑥 = 4. Hence, the same number of
lamps that max profits in (b) is the same number for which 𝑀𝑅 = 𝑀𝐶

4. (a) is concave at 𝑥 = 2; (b) is convex at 𝑥 = 2

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