HST-102

BASIC ECONOMICS

ASSIGNMENT: REVENUE, PROFIT AND BREAK EVEN ANALYSIS

Submitted
Submitted By:By: Ananya
Ananya Maheshwari
Maheshwari
2019UME1218
2019UME1218
Batch:
Batch: F-1F-1

ANSWER 1:

C(x) =28x+465
R(x) =52x, where x is the level of output
A) Profit(π) = R(x)-C(x)
= 52x-(28x+465) = 24x-465

B) From selling 25 items, profit(π) will be =24*(25)-465 = 600-465 = 135

Thus, Profit (π) = 135

C) Break-Even point is the point where profit(π) becomes 0.

∴ π = 24x-465 = 0 ⇒ 24x = 465
⇒ x = 465/24 = 19.375
∴ Break Even point occurs at x = 19.375.

ANSWER 2:

Given that the firms are perfectly competitive.

C(x) = x3-3x2+15x+27
R(x) = 15x
Profit (π) = R(x)-C(x) = 15x- x3+3x2-15x-27
For maximizing profit, the two necessary conditions are 1) The first derivative of π is 0 and 2) The second
derivative of π is negative.
d(π)/dx = d(15x- x3+3x2-15x-27)/dx = 15-3x2+6x-15 = 6x-3x2 = 0
⇒ 6x=3x2 ⇒ x = 2
d2(π)/dx2 = 6-3x > 0
⇒x>2
Since third derivative of π is >0 at x=2, x=2 will be the maxima point of π.
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 Assignment: Revenue, Profit And Break Even Analysis

Thus, Profit maximizing level of output is at x=2, i.e. 2 units of the item are sold. Also, the maximum profit will
be 15*2-23+3*22-15*2-27 = -23
So, maximum profit is -23 when 2 units are sold.

ANSWER 3:

Nature of market is Monopolistic.

The demand function is given as P = 200-5Q
For a monopolistic firm, P = Average Revenue (AR). Thus, AR = 200-5Q
Hence, Total Revenue (TR) will be AR*Q = 200Q-5Q2 ⇒ TR= 200Q-5Q2
It is also given that Marginal Cost of production (MC) is Rs. 50.
For maximizing the profit (π), its first derivative should be zero and second derivative should be negative.
d(π)/dQ = 0. Since π = TR-TC, d(π)/dQ = d(TR)/dQ – d(TC)/dQ .
d(TR)/dQ – d(TC)/dQ = 0 ⇒ Marginal Revenue (MR) – Marginal Cost (MC) = 0.
MR = d(TR)/dQ = 200-10Q and MC = 50 (given).
⇒ 200-10Q-50=0
⇒ 10Q = 150
⇒ Q = 15
Slope of MR (d2(TR)/dQ2) = d(MR)/dQ = -10
Slope of MC (d2(TC)/dQ2) = d(MC)/dQ = 0
Since d2(TR)/dQ2 < d2(TC)/dQ2 at Q=15, Q=15 will be the maxima of profit (π) curve.
Profit corresponding to Q=15 is 200 – 5*15 = 125
Thus, Profit maximizing price will be Rs. 125 and the output of the monopolist will be 15 items.

ANSWER 4:

Nature of market is Monopolistic.

Demand Function is given as P = 100-X
For a monopolistic firm, Average Revenue (AR) is equal to P (Demand Function) ⇒ AR = 100-X
Hence, Total Revenue (R) = AR*X = 100X-X2.
Total Cost is given as C = X3/3-7X2+111X+5
Marginal Revenue (MR) = d(R)/dX = 100-2X
Marginal Cost (MC) = d(C)/dX = X2-14X+111
For profit (π) maximization, MR=MC and d(MR)/dX < d(MC)/dX
MR=MC
⇒ 100-2X = X2-14X+111
⇒ X2-12X+11=0

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 Assignment: Revenue, Profit And Break Even Analysis

⇒ X = 1, 11
d(MR)/dX = -2
d(MC)/dX = 2X-14 = -12 (at X=1) and 8 (at X=11)
At X=1, d(MR)/dX > d(MC)/dX {-2>-12}, therefore, X=1 is a point of minima of profit (π) curve.
At X=11, d(MR)/dX < d(MC)/dX {-2,8}, therefore, X=11 is a point of maxima of profit (π) curve.
Hence, profit maximizing level of output of the firm will be X=11 and profit will be Rs. 89.

ANSWER 5:

OUTPUT TOTAL FIXED TOTAL TOTAL COST TOTAL REVENUE PROFIT

(UNITS) COST VARIABLE COST (TC=TFC+TVC) (TR) (TR-TC)
(TFC) (TVC)
0 100 0 100 0 -100
20 100 70 170 90 -80
40 100 140 240 180 -60
60 100 210 310 270 -40
80 100 280 380 360 -20
100 100 350 450 450 0
120 100 420 520 540 20
140 100 490 590 630 40
160 100 560 660 720 60
(Columns in Blue were added, and those in black were given in the question.)

Break Even level of output is the level of output where the profit is zero. From the table, it is clear that profit is
0 when output is at 100 units. Therefore, Break Even level of output is 100 units.