2. Graph total revenue and total cost on one graph. Graph profit on a separate graph.

Be sure that
output is on the x-axis.

a. What is the profit maximizing level of output?

The profit maximization occurs at 5 or 6 ping pong balls.

b. Describe what profit maximization looks like in each of the graphs.

It has a big gap between the two lines. You find that when the graph peaks on profit.

3. Graph the marginal revenue and marginal cost columns in a separate graph.

a. Compare this MR-MC graph to the profit graph. What happens to profit when ? What
happens to profit when ?

it means we’re making more money than we are losing in cost. When we produce that extra quantity
we get more revenue.

b. At what point on MR-MC graph is profit maximized? Explain the logic of this point in non-
mathematical (that is, in real world economic) terms. TR = P × Q MC = ΔTC ΔQ ATC = TC Q AFC = TFC Q
AVC = TVC Q TC = TFC + TVC Π = TR − TC MR = ΔTR ΔQ MR > MC MR < MC Econ 2010

it is where they intersect, where profit is maximized. 6 is the profit maximization in this graph.

4. Add average total cost to the MR-MC graph. Try increasing and decreasing the price (be sure to
change the price at every quantity). Notice that if you have done the Excel formulas correctly, all the
calculations and graphs should automatically change. Notice what happens to profit as the price (or MR
in the graph) goes below and above average total cost.

a. For what range of prices is maximized profit positive?

When you go above the original $3 price.

b. For what range of prices is maximized profit negative?

when you go closer to $1

c. For what price is maximized profit zero?

At $1.50 the max profit that you can get is zero. MR=MC=ATC.

d. Based on your answers, what is the relationship between and ATC?

It is where the ATC and the MR intersect. If the p line is below ATC then you are losing profit
because the costs are greater than the revenue.

5. Add average variable cost to the MR-MC graph. Now as you change the price, notice what happens to
total revenue at the profit maximizing quantity, and total revenue’s relationship to (total) variable costs.

a. For what range of prices does total revenue cover total variable costs at the profit maximizing
level of output?
 The cut off for price that the total revenue will cover the TVC is $0.50. When it is below this
the total variable costs aren’t covered.

b. For what range of prices does total revenue fail to cover total variable costs at the profit
maximizing level of output?

if the total revenue price is below fifty cents then it will fail to cover the TVC.

c. Paulo has no choice but to pay the fixed costs in the short run. However, Paulo does have a
short run choice of whether to produce ping pong balls or not (that is, Paulo can choose an output of
zero, or the profit maximizing level of output). Based on your answers above, if the maximized profit is
negative, when should Paulo choose to not produce ping pong balls in the short run?

When he is below both the ATC and AVC. If he is still above the AVC it is still good for him to
keep producing in the short run.