Profit Maximization Problem

Profit Maximization Problem

EXAM IN PROFIT MAXIMIZATION AND LOSS MINIMIZATION
MONSOUR A. PELMIN

Problems

1. MONSOUR PELMIN SPORTS CORP. produces golf balls and can sell them for Php.15 each. The output, price, average revenue,

Marginal revenue, marginal cost, average variable cost, and average total cost are shown in the table below.

  a. Fill in the values for average revenue and marginal revenue in the table above.

b. On the axes provided below, plot the marginal revenue and the average total, average variable, and marginal costs. What is the profit-maximizing level output? How do you know? How much profit will the firm makes? Shade the area of profit on the graph.

2. Using the same data presented in the table above, suppose the price of golf balls drops to P3. Show the profit-maximizing or loss-minimizing level of output. Should this firm continue to produce at this price? How do you know? Calculate the amount of profit or loss at this price. Shade this area on the graph.

3. Suppose the price of golf balls drops to P2. What should the firm do now? How do you know?

ANSWER KEYS

1.
a. The average revenue and marginal revenue are the same as price. They are all P15.

b. The graph shown on the following page gives the profit-maximizing output and level of profit. The Firm maximizes profit by producing 7,000 balls. Profit is (P15.00- P8.5)7,000 = P45, 500.

The profit maximizing level of output occurs where MR = MC.

2. The firm’s loss is shown below as the area defined by (P7- P3) x 4,000 = P16, 000. The average total cost is P7, and the marginal revenue equal to price is P3. The firm should continue to produce because price covers average variable cost.

3. The firm should shut down. The lowest point on the AVC curve is at P3, and the P2 price is below that.

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