2.

Setting the derivative of the total cost function equal to the derivative of the total revenue function
and solving for Q yields the same result as setting the total profit function equal to 0 and solving for
Q.

TR = 170Q - 5Q2
MR = 170 - 10Q
TC = 40 + 50Q + 5Q2
MC = 50 + 10Q

MR = MC
170 - 10Q = 50 + 10Q
120 = 20Q
6 = Q*

π = 170Q - 5Q2 - 40 - 50Q - 5Q2

= - 40 + 120Q - 10Q2
dπ = 120 - 20Q = 0
dQ
120 = 20Q
6 = Q*

3. Given the market price and its cost structure, this firm will be incurring a loss. However, this loss
will not be as large as its fixed cost. In other words, this firm will have a positive contribution margin.
In the short run, it should remain in operation. In the long run, it may have to consider dropping out
of this market if the price does not rise above its average cost or if it cannot manage to lower its
average cost below the market price. However, other firms may decide to drop out before it does and
their actions may cause the market price to rise (i.e., a long run leftward shift in supply). Furthermore,
for some reason, demand may increase in the long run, thereby causing price to rise (i.e., a long run
rightward shift in demand).

4. a. To answer this question, we illustrate how Excel software can help to answer this question. Using
the online software provided for users of this text, we arrive at the following:

Total Total
Total Fixed Variable Total Total
Quantity Price Revenue Cost Cost Cost Profit
0 100 0 50 0 50.00 -50.00
1 92 92 50 71 120.60 -28.60
2 84 168 50 125 174.80 -6.80
3 76 228 50 166 216.20 11.80
4 68 272 50 198 248.40 23.60
5 60 300 50 225 275.00 25.00
6 52 312 50 250 299.60 12.40
7 44 308 50 276 325.80 -17.80
8 36 288 50 307 357.20 -69.20
9 28 252 50 347 397.40 -145.40
10 20 200 50 400 450.00 -250.00
Demand Coefficient 100 8 Fixed Cost 50.00
Cost coefficients 80 10 0.6
 The optimal price is $60 and the optimal quantity is 5.

We can be more precise if we employ calculus to find the short run profit maximizing price. Let
us follow the procedure explained in detail in the appendix to Chapter 2. We simply state the
profit function as TR - TC. We then take the first derivative of this function, set it equal to zero
and solve for Q. We can then find the optimal price by inserting this value of Q into the demand
equation.

TR = 100Q - 8Q2

II = 100Q - 8Q2 - 50 - 80Q + 10Q2 - 0.6Q3

dII/dQ = 100 - 16Q - 80 + 20Q - 1.8Q2 = 0

Using the formula for finding the roots of a quadratic equation, we arrive at:

Q = -4 + or - 12.65
-3.6
Q* = 4.625 and P* = $63
b. In order to find the price that maximizes total revenue, we can use the spreadsheet above. We see
total revenue is maximized at a price of $52. Using calculus simply involves taking the first
derivative of the total revenue function (i.e., MR), setting it equal to zero and solving for Q. Using
this Q in the demand equation will give us the revenue maximizing price.
ÄTR/ÄQ = 100 - 16Q = 0
Q* = 6.25
P* = $50

(Notice that the spreadsheet will also indicate a price of $50 if the values of quantity were set for
small intervals.)

c. If the firm wanted to use a linear approximation of the cubic equation, it might simply derive the
linear equation in the manner shown in the figure below.

500

400

300
TC1
$
TC2
200

100

0
0 1 2 3 4 5 6 7 8 9 10
Q

Figure 8.3