ECO251 Problem Set 10 Maximizing Profit

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1. The table below shows the hourly output and cost structure for a small-town pizza shop. Calculate Marginal Revenue and Marginal Cost to determine the pizza shop’s profit-maximizing rate of output. Assume that the price of a pizza in this town is $10.

Hourly Output of Pizzas Total Hourly Cost ($)

0 5

1 9

2 11

3 12

4 14

5 18

6 24

7 32

8 42

9 54

10 68

2. Consider the business whose Total Cost and Total Revenue for various quantities of a particular product are shown in the table below.

Quantity

Total Cost

Total Revenue

0

100

0

1

250

500

2

350

950

3

500

1350

4

725

1700

5

1000

2000

6

1400

2250

Use the Profit-Maximizing Rule to explain the quantity that this business should produce to maximize its profits. To receive any credit, your answer must both state the number to produce and an explanation of how you used the profit-maximizing rule to arrive at that number.

3. Daniel Jones thought he was getting his girlfriend the best surprise Valentine’s Day gift ever. He bought two airline tickets for the couple to fly from their home in Cambridge, England to Belfast, Northern Ireland to see her favorite band, the Red Hot Chili Peppers. With over 80 million records sold worldwide, Red Hot Chili Peppers are one of the best-selling bands of all time. Jones’ girlfriend had always wanted to see the band perform live, and Jones thought nothing could be better than a romantic trip to see the band play live on Valentine’s Day. Jones managed to keep the concert tickets a surprise until they landed in Belfast – in their hotel room she opened the envelope in which he had placed the concert tickets for her favorite band. Jones was surprised when his girlfriend, rather than jumping for joy, simply turned to him with a puzzled look on her face. It was then that Jones looked more carefully at the tickets, to realize that he had purchased two seats for a performance by the Red Hot Chili Pipers, the self-proclaimed “most famous bagpipe band in the world.” Jones later admitted that he was surprised at what a good deal he’d gotten on the tickets.

Image result for red hot chili pipers images

Here is the question: Having spent the equivalent of a thousand dollars or so on the airline tickets, hotel room, and concert tickets, should the couple actually go to the Red Hot Chili Pipers concert? Use sound economic reasoning to explain your answer. In particular, identify the concept that is the basis for your answer; explain that concept in general; and then apply that concept to this particular situation.

4. The Lead Zeppelin Company produces powered and steerable lighter-than-air craft. The company’s airships are specially lined and are therefore safer than normal dirigibles. The table below shows the weekly production of dirigibles, along with the associated Average Cost and Total Revenue figures (the Average Cost and Total Revenue figures are actually in thousands of dollars, so the $15 represents $15,000, but we have left off the zeros to save space).