CHAPTER 1:

Intersection of MC with MR or AVC

Quadratic equation arise in economics when we want to discover where a
quadratic function, say marginal cost, cuts another quadratic function, say
average variable cost, or cuts a linear function, say marginal revenue. We
equate the two functional expressions, then subtract the right-hand side from
both sides so that the value on the right becomes zero. After collecting terms
we solve the quadratic equation using one of the methods explained above.

Example:
A firm has the marginal cost function MC=3Q^2-32Q+96 and marginal
revenue function MR= 236-16Q. Find the firm’s profit maximizing output

Answer:
To maximize profits the firm choose to produce where cost equals marginal
revenue. Equating the MC=MR functions we have that
 3Q^2-32Q+96 = 236-16Q
subtracting the right –hand side from both sides gives
3Q^2-32Q+96 – 236+16Q=0
and by collecting terms we obtain
3Q^2-16Q-140=0
we now use the formula for solving a quadratic equation
x=(-b(+or-)root b^2-4ac)/2a
where a=3, b=-16 and c=-140. Calculation the expression with
the square root sign gives. We then have
X=(16(+,-)44)/2*3=60/6 or -28/6
so x=10 or x=-4.67. Only the positive value is economically
meaningful, so profit maximization occurs when x=10.
Example:
A firm in perfect competition has the average variable cost
function AVC=0.85Q^2-11.9Q+102 and the marginal cost
function MC=2.55Q^2-23.8Q+102. What is the firm’s minimum
supply price?

Answer: A firm in perfect competition faces a horizontal demand

curve. Its supply curve is its marginal cost curve above the point
where MC and AVC intersect. By equating MC and AVC we find
the lowest output the firm would supply.
2.55Q^2-23.8Q+102=0.85Q^2-11.9Q+102
2.55Q^2-23.8Q+102-0.85Q^2+11.9Q-102=0
By collecting terms we have
1.7Q^2-11.9Q=0
Factorizing we find Q(1.7Q-11.9)=0
below, which does not occur at the origin. The other value of Q comes from 1.7Q=11.9
which gives Q=7 as the output where MC and AVC intersect.
If the horizontal price line cuts MC at this point, a quantity of 7 is supplied and the
price is the same as the value of MC. We substitute Q=7 in the marginal cost function
to find the required price . This gives

MC=2.55(7^2)-23.8(7)=60.35
and so the minimum supply price is 60.35

100 Supply
MC
80
AVC
60

40
Minimum supply price
0
0 2 4 6 8 10 Q
 Homework
1. What is the profit maximizing output for a firm with the marginal
cost function MC=1.6Q^2-15Q+60 and marginal revenue function
MR=280-20Q?

2. What is the minimum supply price for a perfectly competitive firm

which has the average variable cost function AVC=1.4Q^2-24Q+250
and the marginal cost function MC=4.2Q^2-48Q+250?