NAME NOMAN ALI

ROLL NO BC200409477
SUBJECT CODE ECO 401
ASSIGNMENT NO 2 SOLUTION
QUESTION
Suppose total revenue (TR) and total cost (TC) functions of Samsung are following:
TR = 175Q – 2.5Q2
TC = 50 + 10Q
Requirements:
a) Calculate profit maximizing output level of Samsung using marginal revenue (MR) and marginal cost (MC)
approach.
b) Find out the amount of profit earned by Samsung at profit maximizing level of output calculated in part a.
c) Calculate average revenue (AR) function and slope of average revenue (AR) function.

SOLUTION
a) Calculate profit maximizing output level of Samsung using marginal revenue (MR) and marginal cost
(MC) approach.

Profit is maximized at the point where:

MC = MR
Marginal Cost (MC) function can be found by taking derivative of total cost (TC) function.
d ( TC )
MC=
dQ
d
MC= ( 50+10 Q )
dQ
MC=10
Marginal Revenue (MR) function can be found by taking derivative of total revenue (TR) function.
d ( TR )
MR=
dQ
d
MR= ( 175Q−2.5 Q 2)
dQ
MR=175−5 Q
As, profit is maximized at the point where MR = MC. So, by equating values of MC and MR function. We get,
MC=MR
10=175−5 Q
5 Q=175−10
5 Q=165
165
Q=
5
Q=33
b) Find out the amount of profit earned by Samsung at profit maximizing level of output calculated in part a.
The equation for total profit is:
Tπ=TR−TC

Tπ=( 175Q−2.5 Q 2 )−( 50+10 Q )

Tπ=175 Q−2.5Q 2−50−10 Q

Tπ=165 Q−2.5Q 2−50
Putting Q = 33, we get

Tπ=165 (33)−2.5(33)2−50
Tπ=5445−2.5(1089)−50
Tπ=5445−2722.5−50
Tπ=2672.5
So, profit is maximized where output is 33 and the maximum profit is 2672.5.
c) Calculate average revenue (AR) function and slope of average revenue (AR) function.

We can also calculate Average Revenue (AR)

TR=175Q−2.5 Q2
TR
AR=
Q

175Q−2.5 Q 2
AR=
Q
175Q 2.5 Q 2
AR= −
Q Q
AR=175−2.5Q
AR=175−2.5(33)
AR=175−82.5
AR=92.5
Slope of Average Revenue (AR) function:
d ( AR)
Slopeof AR=
dQ
d
Slope of AR= ( 175−2.5 Q )
dQ
Slopeof AR=−2.5