Marginal Analysis

7.2  Marginal Analysis

• Marginal analysis – the analysis of the effect
of adding one extra unit to a variable
• Sample problems:
– Estimate the cost of producing the 500th unit.
– Estimate the revenue derived from the sale of the
15th unit.

7.2  Marginal Analysis

• Cost of producing
– x items: C(x)
– x + 1 items: C(x + 1)
– the (x + 1)st item: C(x + 1) – C(x)
• We use the derivative to approximate the
change in a function caused by a 1-unit
change in its independent variable.
• That is, we use C’(x) as an approximation to
C(x + 1) – C(x).
• We call C’(x) or MC(x) the marginal cost.
7.2  Marginal Analysis
Example. The total cost of producing x units of a
commodity is C(x) = 10,000 + 90x – 0.05x2.
a) Find the marginal cost function.
b) Use the marginal cost function to estimate
the cost of producing the 500th unit.
c) Find the actual cost of producing the 500th
unit.

7.2  Marginal Analysis

Example. The total cost of producing x units of a
commodity is C(x) = 10,000 + 90x – 0.05x2.
a) Find the marginal cost function.
MC(x)  C(x)  90  0.1x

b) Use the marginal cost function to estimate

the cost of producing the 500th unit.
MC(499)  90  0.1(499)  Php40.10

7.2  Marginal Analysis

 Example. The total cost of producing x units of a
commodity is C(x) = 10,000 + 90x – 0.05x2.
c) Find the actual cost of producing the 500th
unit.
C(500)  C(499)
 10,000  90(500)  0.05(500) 2 

10,000  90(499)  0.05(499)  2

 42,500  42,459.95
 Php40.05
 7.2  Marginal Analysis
Example. In a catering business, the total weekly
cost (in pesos) of fuel to give service to x
regular clients is C(x)  500 10x  3
40 x 2
.
a) Find the marginal cost function.
b) Find the marginal cost of a servicing level of
 per week and interpret the results.
10 clients
c) Find the exact cost of servicing the 11th
regular client.

7.2  Marginal Analysis

Example. In a catering business, the total weekly
cost (in pesos) of fuel to give service to x
regular clients is C(x)  500 10x  3
40 x 2
.
a) Find the marginal cost function.
MC(x) 10  406 x 10  203 x

b) Find the marginal cost of a servicing level of
10 clients per week and interpret the results.
MC(10) 10  203 (10)  Php8.5
Change in cost asx increases from 10 to 11
7.2  Marginal Analysis
 Example. In a catering business, the total weekly
cost (in pesos) of fuel to give service to x
regular clients is C(x)  500 10x  3
40 x 2
.
c) Find the exact cost of servicing the 11th
regular client.

C(11)  C(10)
 (600.925)  (592.5)
 Php8.43


 7.2  Marginal Analysis
The marginal revenue and marginal profit are
approximations to the revenue and profit
derived from the sale of the (x + 1)st unit.

7.2  Marginal Analysis

Ex. Given the cost function C(x)  27,500  62x 2
and the revenue function R(x) 10  40x 12x 2  x 3
find the marginal cost, revenue and profit
when 40 units areproduced.

MC(x) 124x  MC(40) 124(40)  Php4,960

MR(x)  40  24x  3x 2  MR (40)  Php 3,880

  C(x)  27,490  40x  74x 2  x 3
P(x)  R(x)
MP(x)  40 148x  3x 2  MP (40)  Php - 1,080

7.2  Marginal Analysis

Average Functions
• AC(x)  C (xx ) – the average cost function; gives
the cost of manufacturing or producing each
of the x units of output
• AVC(x)  VC(x )
x – average variable costs
• AFC(x)  FC(x x
)
– average fixed costs
• AR(x)  R(x)
x  x  p
px
– average revenue
function; gives the contribution of each unit
sold to total revenue

7.2  Marginal Analysis

Example. For the total cost function C(x)  25  5x ,
determine the average cost, the average variable
cost, the average fixed cost, the marginal cost,
and the marginal averagecost functions.

Average cost: AC(x)  255x

x  25
x 5
Average variable cost: AVC(x)  5xx  5
Average fixed cost: AFC(x)  25x
 cost: MC(x)  5
Marginal
  25
Marginal average cost: MAC(x)   x  5   2
25

 x
7.2  Marginal Analysis

1. Let C(x) = 150 + 75x be the cost function of a
manufacturing company.
a) Find the marginal cost function MC(x). Does
MC(x) vary with output?
b) Show that the derivative of the cost function
and the variable cost function with respect to
output provide the same answer.

7.2  Marginal Analysis

1. Let C(x) = 150 + 75x be the cost function of a
manufacturing company.
a) Find the marginal cost function MC(x). Does
MC(x) vary with output?

MC(x) = 75. The value of the marginal cost is

constant. Hence, it does not vary with the
output.

7.2  Marginal Analysis

 1. Let C(x) = 150 + 75x be the cost function of a
manufacturing company.
b) Show that the derivative of the cost function
and the variable cost function with respect to
output provide the same answer.

C(x)  75
v(x)  75x  v(x)  75

Therefore, C(x)  v(x)

 
7.2  Marginal Analysis
3. A firm's fixed costs are Php15,000 and
variable costs are given by Php28x.
a) Write the equation for C(x). What is the firm's
cost for producing x = 500 units of its
commodity?
b) Write the equation for MC(x). What is the
value of MC(x) when x = 500? Describe in
words the meaning of this function.

7.2  Marginal Analysis

3. A firm's fixed costs are Php15,000 and
variable costs are given by Php28x.
a) Write the equation for C(x). What is the firm's
cost for producing x = 500 units of its
commodity?
C(x)  28x 15,000
C(500)  Php29,000

7.2  Marginal Analysis

3. A firm's fixed costs are Php15,000 and
variable costs are given by Php28x.
b) Write the equation for MC(x). What is the
value of MC(x) when x = 500? Describe in
words the meaning of this function.
MC(x)  28
MC(500)  28

The marginal cost does not vary with the output.

7.2  Marginal Analysis

5. Given a perfectly competitive firm's demand
function, D(x) = 35, find expressions for the
marginal and average revenue functions.

R(x)  xD(x)  35x

MR(x)  35
AR(x)  D(x)  35

7.2  Marginal Analysis

15. Given the functions, (i) AR(x) = 150 – 15x
and (ii) AR(x) = 25
a) Write down the equations for the total
revenue functions.
b) Write down the equations for the marginal
revenue functions.
c) Comment on the relationship between MR(x)
and AR(x).
d) Graph R(x), MR(x), and AR(x) on the same
set of axes.
7.2  Marginal Analysis
15. Given the functions, (i) AR(x) = 150 – 15x
and (ii) AR(x) = 25
a) Write down the equations for the total
revenue functions.
R1(x)  150x 15x 2
R2 (x)  25x

b) Write down the equations for the marginal


revenue functions.
MR1(x) 150  30x MR2 (x)  25

7.2  Marginal Analysis

 15. Given the functions, (i) AR(x) = 150 – 15x
and (ii) AR(x) = 25
c) Comment on the relationship between MR(x)
and AR(x).

The slopes of the curves MR1 and AR1 are such

that mMR  2mAR . The second revenue
1 1

function R2 is such that mMR  mAR .

2 2


 7.2  Marginal Analysis
15. Given the functions, (i) AR(x) = 150 – 15x
and (ii) AR(x) = 25
d) Graph R(x), MR(x), and AR(x) on the same
set of axes.

(i) sage: plot([150*x-15*x^2,150-

30*x,150-15*x])
(ii) sage: plot([25*x,25,25])

7.2  Marginal Analysis

17. A manufacturer's total monthly revenue is
R(x)  280x  201 x 2 pesos when x units are
p
produced during the month. Currently, the
manufacturer is producing 80 units a month
and is planning to decrease the monthly
output by 0.65 unit. Estimate how the total
monthly revenue will change as a result.
Decrease in monthly output : x  80  0.65  79

MR(x)  280  101 x MR(79)  Php287.90

7.2  Marginal Analysis

21. A manufacturer's total cost is
C(x)  18 x 3  12 x 2  500x  600 where x is the
number of units produced.
a) Use marginal analysis to estimate the cost of
manufacturing the 14th unit.
b) Compute the actual cost of manufacturing
the 14th unit.

7.2  Marginal Analysis

21. A manufacturer's total cost is
C(x)  18 x 3  12 x 2  500x  600 where x is the
number of units produced.
a) Use marginal analysis to estimate the cost of
manufacturing the 14th unit.
MC(x)  38 x 2  x  500 MC(13)  Php550.38

b) Compute the actual cost of manufacturing

the 14th unit.
 58,321
C(14)  C(13)  7,845  8  Php554.88

7.2  Marginal Analysis

25. Suppose the total revenue in dollars from the
sale of x units of a certain commodity is
R(x)  2x 2  68x  256
a) At what level of sales is the average revenue per
unit equal to the marginal revenue?
b) Verify that the average revenue is increasing if
the level of sales is less than the level in part (a)
and decreasing if the level of sales is greater than
the level in part (a).
c) On the same set of axes, graph the relevant
portions of the average and marginal revenue
functions.

7.2  Marginal Analysis

25. Suppose the total revenue in dollars from
the sale of x units of a certain commodity is
R(x)  2x 2  68x  256

a) At what level of sales is the average revenue

per unit equal to the marginal revenue?
AR(x)  2x  68  256
x
AR(x)  MR(x)
2x  68  256
x  4 x  68
MR(x)  4x  68
x  8 2  12


 7.2  Marginal Analysis
 25. Suppose the total revenue in dollars from
the sale of x units of a certain commodity is
R(x)  2x 2  68x  256

b) Verify that the average revenue is increasing if

the level of sales is less than the level in part
(a) and decreasing if the level of sales is
greater than the level in part (a).
2(128x 2 )
AR(x)  2  256
x2
 x2
AR(x)  0 (or AR is increasing) whenx  8 2
AR(x)  0 (or AR is decreasing) when x  8 2

7.2  Marginal Analysis


25. Suppose the total revenue in dollars from
the sale of x units of a certain commodity is
R(x)  2x 2  68x  256

c) On the same set of axes, graph the relevant

portions of the average and marginal revenue
functions.

sage: plot([-2*x+68-(256/x),(-
4*x+68)])

7.2  Marginal Analysis