Tom Railbon is an artist. He has a particular piece of sculpture that he makes a

Question

Tom Railbon is an artist. He has a particular piece of sculpture that he makes and sells at local art fairs. He sells the sculpture for $220. Recently he decided it was time to actually do an economic analysis of his business to see how many pieces he should sell to maximize his profit. He came up with the following analysis of his costs:

                                                                Quantity              Total Variable Cost                                        

                                                                       1                                       $200

                                                                       2                                       $380

                                                                       3                                       $540

                                                                       4                                       $720

                                                                       5                                       $920

                                                                       6                                   $1,170

                                                                       7                                   $1,470

In addition to the variable costs, he also figures he has $100 in fixed costs. Using that information complete the following table:

Quantity    Total Variable Cost   Total Cost       Marginal Cost    Total Revenue      Marginal Revenue                                                                        

       1                       $200

       2                       $380

       3                       $540

       4                       $720

       5                       $920

       6                     $1,170

       7                     $1,470

Now, using the Marginal Cost and Marginal Revenue, explain what quantity Tom should produce to maximize his profit.

  

Explanation / Answer

Price per sculpture = $220

Fixed Cost = $100

Following is the complete table -

TC

(TVC+TFC)

TR

(P*Q)

MC

(TCn - TCn-1)

MR

(TRn - TRn-1)

According to Marginal revenue-Marginal cost concept, a firm maximizes its profit when it produce that level of output at which marginal cost is equal to marginal revenue or marginal revenue is greater than marginal cost and further increase in output results in marginal cost becoming greater than marginal revenue.

Above table clearly depicts that upto production of 5 pieces of sculpture, marginal revenue is greater than marginal cost. However, further increase in production that is production of 6th unit results in marginal cost becoming greater than marginal revenue.

So, the profit-maximizing quantity for Tom is 5 pieces of sculpture.

Thus, the quantity that Tom should produce to maximize his profit is 5 pieces of sculpture.

Q P TVC TFC

TC

(TVC+TFC)

TR

(P*Q)

MC

(TCn - TCn-1)

MR

(TRn - TRn-1)

0 220 0 100 100 0 - - 1 220 200 100 300 220 200 220 2 220 380 100 480 440 180 220 3 220 540 100 640 660 160 220 4 220 720 100 820 880 180 220 5 220 920 100 1020 1100 200 220 6 220 1170 100 1270 1320 250 220 7 220 1470 100 1570 1540 300 220

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