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Exercises (MEC) : So TR Is Maximized When Q 5

1. The document contains 3 examples of maximizing or minimizing different economic concepts. 2. The first example finds that total revenue is maximized at an output of 5 units, by setting the marginal revenue equal to zero. 3. The second example finds that marginal cost and average cost are minimized at outputs of 2.67 and 4 units respectively, using the first and second order conditions for minimization. 4. The third example calculates profit as total revenue minus total cost, then finds the output of 4 units maximizes profit by setting the first derivative of profit equal to zero and ensuring the second derivative is negative.

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Sachin Singh
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134 views3 pages

Exercises (MEC) : So TR Is Maximized When Q 5

1. The document contains 3 examples of maximizing or minimizing different economic concepts. 2. The first example finds that total revenue is maximized at an output of 5 units, by setting the marginal revenue equal to zero. 3. The second example finds that marginal cost and average cost are minimized at outputs of 2.67 and 4 units respectively, using the first and second order conditions for minimization. 4. The third example calculates profit as total revenue minus total cost, then finds the output of 4 units maximizes profit by setting the first derivative of profit equal to zero and ensuring the second derivative is negative.

Uploaded by

Sachin Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Exercises (MEC)

1. Example I
If the total revenue function is given by: TR= 100Q- 10Q2, find the level of output at which
total revenue is maximised?

TR = 100Q – 10Q2

TR
MR = ----- = 100 – 20Q
Q

TR is Maximized, when MR = 0 (Ist order condition)

= 100 – 20Q = 0

100
 Q = ------ = 5
20

IInd Order condition for Maximum

2TR
-------- < 0
Q2
2TR
-------- = -20 < 0
Q2

So TR is maximized when Q = 5

2. Example 2
If the total Cost function is given by: TC= Q3- 8Q2+ 57Q, find the level of output at
which Marginal and Average cost is minimised ?

(a) TC = Q3 – 8Q2 +57Q

TC
------ = Mc = 3Q2 – 16Q + 57
Q2

Mc is minimized, when Mc


------ = 0 (1st order condition)
Q

Mc
------ = 6Q – 16 = 0
Q
Q = 16/6 = 2.67
Second order condition, For Mc to be minimum,

 2Mc 2Mc
------ = 6 > 0 ------- > 0
Q2 Q2

So Mc is minimized, when Q = 2.67

(b) TC= Q3 – 8Q2 + 57Q

TC
AC = ---- = Q2 – 8Q + 57
Q

Ac is minimized, when AC


------ = 0 (Ist order condition)
Q

Ac
------ = 2Q – 8 = 0
Q

 Q=4

IInd order condition

2Ac
------- > 0 for Ac to be minimum
Q2

2Ac
------- = 2 > 0, so Ac is at minimum when Q = 4
c2

3. Example 3
If the total revenue function is given by: TR= 45Q- 0.5Q2 and If the total Cost function is
given by: TC= Q3- 8Q2 +57Q+2, find the level of output at which profit is maximised ?
TR = 45Q – 0.5Q2

TC = Q3 – 8Q2 + 57Q + 2

 = TR – TC = -Q3 + 7.5Q2 – 12Q - 2


----- = 0 = -3Q2 + 15Q – 12 = 0
Q
-b  √b2 – 4ac
Q= ------------------
2a

-15  √225 – (4 x –3 x –12


= ------------------------------
-6

-15  √225 – 144


= --------------------
-6

-15  √81
= -----------
-6

-15 + 9 -15 - 9
= ----------- or -----------
-6 -6

Q = 1 or Q = 4

2
----- = – 6Q + 15 < 0 when Q = 4
Q2
So when Q = 4,  is maximized

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