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Profits


Question 1

Consider the following total costs and average revenue (price) for a small firm making boats.

Profits
All figures are in 000's

OUTPUT PRICE FIXED COST  VARIABLE COST TOTAL COST ATC MC TR MR Profit
0 100     100          
1 90     140          
2 80     160          
3 70     170          
4 60     190          
5 50     220          
6 40     290          
7 30     360          
8 20     560          

  1. Complete all the missing figures.

  2. Plot ATC, MC, AR and MR.

  3. What is the profit maximising output (to a whole number)?

  4. Show the area representing super-normal profits if the firm is maximising its profits.

  5. What is sales revenue maximising output?

  6. Explain what happens to efficiency if the firm chooses to operate at profit maximisation.

See: answer

Question 2

OUTPUT PRICE FC  VC TC ATC MC TR MR Profit
0 20     10          
1 18     16          
2 16     22          
3 14     30          
4 12     40          
5 10     52          
6 8     66          
7 6     84          
8 4     106          

Consider the above data for a firm (UK Airparts Plc.) making complex electronic navigation systems for aircraft.  (Marks are in brackets)

  1. Complete missing figures. (10)

  2. Plot ATC, MC, AR and MR. (10)

  3. What would be profit maximising output?  (4)

  4. Show the area representing super-normal profits on your graph, assuming the firm is maximising profits. (4)

  5. What is the output at which the firm maximises sales revenue? (4)

  6. What is the most productively efficient output? (2)

  7. Assume the firm chooses to operate at profit maximisation – evaluate this decision in terms of efficiency. (10)

  8. It has recently been under threat from new entrants into the market. What could the firm do in response? (8)

  9. What is the impact of a 50% rise in variable costs on the firm's profitability? (4)

  10. Show the impact of these changes on your graph. (4)

Answer