JETRO MARK D.

GONZALES 2 BSMA-A
Question 1
If the profit maximum at sales of 700 units does the firm have no choice but to limit
sale at this level? Explain your answer.
= Yes, because increasing output also leads to increasing total cost and as well as total
revenue. At the initial level of production ( when output is 100) marginal cost is greater
than that of additional marginal revenue. However, increasing production by 100 every
time results to declining marginal cost after which marginal cost rises again behaving
like U shape curve. Marginal revenue on the other hand is constant regardless of output.
If we are only concerned about hitting maximum output then we can produce 600 to 700
units. But producing at 600 with marginal revenue is greater than marginal cost is not
optimal.

Question 2
A business firm produces and sells a particular product. Variable cost is ₱30/unit.
Selling prize ₱40 per unit. Fixed cost is ₱60,000.
a. What is the break-even quantity and break-even point? Show your solution.

Break even VC 30
SP 40
FC 60000
Units FC VC TC Rev
0 60000 0 60000 0 BEP 6000
1000 60000 30000 90000 40000
2000 60000 60000 120000 80000
3000 60000 90000 150000 120000
4000 60000 120000 180000 160000
5000 60000 150000 210000 200000
6000 60000 180000 240000 240000
BREAK EVEN POINT- 6000
BREAK EVEN QUANTITY- 240000
 Question 3
A manager makes the statement that output should be expanded as long as average
revenue exceeds average cost. Does this strategy makes sense? Explain.
= This strategy is incorrect because the optimal quantity should be decided on the
marginal revenue and marginal costs rather than the average revenue and average costs.
If may not necessarily hold that the average revenue being higher than average cost
would lead to profits for the firm. To decide whether an additional product should be
produced or not, the firm should consider the additional cost involved with the
production of this extra cost and the additional revenue incurred from the sale of this
product. If this marginal revenue exceeds the marginal cost then the firm should produce
that additional unit. This decision should be taken at all levels of output and the firm
should produce till the point where MR=MC

Question 4
Suppose that the steel firms cost are shown bellow:
Complete the table and determine the optimal output to be produced.

Output (Q) TFC TVC TC MC TR MR Profit/Loss

0 500 0 500 0 -500

1 500 50 550 50 175 175 -375

2 500 90 590 40 350 175 -240
3 500 140 640 50 525 175 -115
4 500 200 700 60 700 175 0
5 500 270 770 70 875 175 105
6 500 350 850 80 1050 175 200
7 500 450 950 100 1225 175 275
8 500 600 1100 150 1400 175 300
9 500 800 1300 200 1575 175 375
*Price of steel is ₱175/unit
The optimal output is 4