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Marginal Cost and Profit Maximization

1) Fill in the missing values in the following table:

Quantity Fixed cost Variable Cost Total Cost Total Average Cost Marginal Cost

0 $55 $0 $55 $0

1 $55 $30 $85 $55

2 $55 $55 $110 $27.50

3 $55 $75 $130 $18.33

4 $55 $105 $160 $13.75

5 $55 $155 $210 $11

6 $55 $225 $280 $9.16

7 $55 $315 $370 $7.86

Given a price of $40, at what level of production will this company maximize profits? Why?

2) Why do marginal and average cost curves take a "U" shape?

3) Define "Monopoly". Is it true that a monopolist will maximize profit where Marginal Revenue equals the Average Cost of Production? Why or why not?

4) Real wages (wages without inflation) have continued to increase over the long run. Please explain how this can occur.
(This is a real think about it question, not directly in the book)


Solution Preview

Marginal cost is the difference between the variable cost of the last item produced and the current variable cost. So for one item it would be $25. For the second, it is $20. For the third ist is $30, the fourth $50, the sixth $70, and for the last it is $90.

Notice in the prior question that marginal cost falls and then increases. This is typical for most firms. At first they find they can make better use of their resources when output increases. But after a certain point, it becomes more expensive to increase output. Workers have to be paid overtime, or the ...

Solution Summary

How firms use marginal cost and marginal revenue to maximize their profits