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Overview of Topic 2
• Revenue Relations • Profit Relations
Topic 2 o Demand and Total Revenue
o Marginal and Average
o Total Profit
o Marginal and Average Profit
Economic Revenue
o Linear Demand Equation
o Types of Profit
• Economic Optimization
Optimization • Cost Relations
o Total Cost
o Profit Maximization
o Total Revenue Maximization
o Marginal and Average Cost o Average Cost Minimization
Introduction to Managerial Economics
Ms. May Thu
1 2
1 2
Revenue Relations Liner Demand Equation
Demand and Total Revenue
• Total revenue: the amount of combination by quantity and price.
𝑻𝑹 𝒇 𝑸 2.1
OR
𝑻𝑹 𝑷 𝑸 2.2
• Marginal Revenue
• The rate of change of total revenue with respect to a change in quantity.
𝒅 𝑻𝑹
𝑴𝑹 2.3
𝒅𝑸
Average Revenue
• Total revenue divided by the number of units produced.
𝑻𝑹
𝑨𝑹 2.4
𝑸
3 4
3 4
Q Sold
P ($) TR ($) MR MR = dTR/dQ
Cost Relations
(000/month)
Total Cost
0 30
• Total costs comprise fixed and variable expenses.
1 27 • Fixed costs do not vary with output while variable costs fluctuate with output.
2 24 𝑻𝑪 𝑭𝑪 𝑽𝑪 2.5
3 21
Marginal Cost
4 18
• The rate of change in total cost associated with a change in quantity.
5 15 𝒅 𝑻𝑪
𝑴𝑪 2.6
𝒅𝑸
6 12
7 9 Average Cost
• Total cost divided by the number of units produced.
8 6
𝑻𝑪
𝑨𝑪 2.7
9 3 𝑸
10 0
5 6
5 6
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Profit Relations Types of Profit
Total Profit • Accounting Profit
• The difference between total revenue and total cost.
𝛑 𝑻𝑹 𝑻𝑪 2.8
Marginal Profit
• The rate of change in total profit associated with a change in quantity.
𝒅𝝅
𝑴𝝅 2.9
𝒅𝑸
OR • Economic Profit
𝑴𝝅 𝑴𝑹 𝑴𝑪 2.10
7 8
7 8
Economics Optimization Economics Optimization
Profit Maximization Total Revenue Maximization
𝑴𝑹 𝑴𝑪 OR 𝑴𝝅 𝟎 2.11 𝑴𝑹 𝟎 2.12
9 10
9 10
Economics Optimization Problems
Average Cost Minimization 2.1. 21st Century Insurance offers mail‐order automobile insurance to
𝑴𝑪 𝑨𝑪 2.13 preferred‐risk drivers in the Los Angeles area. The company is the
low cost provider of insurance in this market but doesn't believe
its annual premium of $1500 can be raised for competitive
reasons. Rates are expected to remain stable during coming
periods; hence, P = MR = $1500. Total and marginal cost relations
for the company are as follows
TC = $ 41 000 000 + $ 500 Q + $ 0.005 Q2
MC = dTC/dQ = $ 500 + $0.01 Q
A. Calculate the profit‐maximizing activity level.
B. Calculate the company's optimal profit, and optimal profit as a
percentage of sales revenue (profit margin).
11 12
11 12
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Problems Problems
2.2. The Portland Sea Dogs, the AA affiliate of the Boston Red Sox 2.3. Giant Screen TV, Inc., is a Miami‐based importer and distributor of
major league baseball team, have enjoyed a surge in popularity. 60‐inch screen HDTVs for residential and commercial customers.
During a recent home stand, suppose the club offered $5 off the Revenue and cost relations are as follows
$12 regular price of reserved seats, and sales spurted from 3200 to TR = $ 1 800 Q ‐ $ 0.006 Q2
5200 tickets per game.
MR = dTR/dQ = $ 1 800 ‐ $ 0.012 Q
A. Derive the function that describes the price‐output relation
with price expressed as a function of quantity (tickets sold). Also PC = $ 12 100 000 + $ 800 Q + $ 0.004Q2
express tickets sold as a function of price. MC = dTC/dQ = $ 800 + $ 0.008 Q
B. Use the information derived in part A to calculate total revenues A. Calculate output, marginal cost, average cost, price and profit at
at prices in $1 increments from $5 to $15 per ticket. What is the the average cost minimizing activity level.
revenue‐maximizing ticket price? If variable costs are negligible, is B. Calculate these values at the profit‐maximizing activity level.
this amount also the profit‐maximizing ticket price?
C. Compare and discuss your answers to parts A and B.
13 14
13 14