Page 583 - Krugmans Economics for AP Text Book_Neat

Tackle the Test: Free-Response Questions
1. Use the data in the table provided. 2. Use a graph to illustrate the typical shape of the two curves
Quantity Total Revenue Total Cost used to find a firm’s profit-maximizing level of output on
Q TR TC the basis of the optimal output rule. Assume all units of
0 $0 $7 output can be sold for $5. Indicate the profit-maximizing
1 18 23 level of output with a “Q*” on the appropriate axis. (You
2 36 29 don’t have enough information to provide a specific
3 54 37 numerical answer.)
4 72 49
5 90 65
6 108 87 Section 10 Behind the Supply Curve: Profit, Production, and Costs
7 126 112
a. What is the marginal revenue of the fourth unit?
b. Calculate profit at a quantity of two. Explain how you
calculated the profit.
c. What is the profit-maximizing level of output? Explain how
to use the optimal output rule to determine the
profit-maximizing level of output.

Answer (5 points)
1 point: $18
1 point: $7

1 point: $36 − $29 or TR − TC
1 point: 5 units
1 point: The optimal output rule states that profit is maximized when MC = MR.
Here, MC never exactly equals MR. When this occurs, the firm should produce
the largest quantity at which MR exceeds MC. At a quantity of 5, MC = $16 and
MR = $18. For the sixth unit, MC = $22 and MR = $18, and because MC > MR,
the sixth unit would add more to total cost than it would to total revenue, and it
therefore should not be produced.

module 53 Profit Maximization 541