FUNCTIONS

Revenue functions and Demand functions

The Revenue functions are related to Demand functions. ie. We can get the Revenue function from
multiplying the demand function by quantity (x).
i.e. Revenue function = Demand function x x

Eg: 1 : If the Demand function is 2x + 3, Calculate the Revenue function.

Revenue function = Demand function x x
= (2x + 3)x x
= 2x2 + 3x

Eg: 2 : If the Demand function is 4x2 + 5x – 3, Calculate the Revenue function.

Revenue function = Demand function x x
= (4x2 + 5x – 3)x x
= 4x3 + 5x2 – 3x

Total cost Functions, Variable cost functions and Fixed cost

The total cost function is included the variable cost function and fixed cost.
i.e. Total cost function = Variable cost function + Fixed cost

Note : Here, variable cost function will be given as a form of quadric function (eg. : 1000x2 + 8000x)
and Fixed cost will be given as a form of amount of money (eg. : Rs. 40 000/-).

Eg: 1 : If the Variable cost function is 2x2 + 3x and the fixed cost is Rs. 300,000/-, Identify the Total
cost function.
Total cost function = Variable cost function + Fixed cost
= 2x2 + 3x + 300,000

Eg: 2 : If the Variable cost function is 4x2 + 2x and fixed cost is Rs. 1000/-, Calculate the Total cost
function.
Total cost function = Variable cost function + Fixed cost
= 4x2 + 2x + 1000

Profit functions
The Profit is obtained by deducting the total cost from the Revenue. Similarly the Profit function is
obtained by deducting the total cost function from the Revenue function.
i.e. Profit function = Revenue function – Total cost function

Eg: 1 : If the Total cost function is 40 + 4x and the Revenue function is 24x – 2x2, Calculate the
Profit function.
Profit function = Revenue function – Total cost function
= 24x – 2x2 – (40 + 4x)
= 24x – 2x2 – 40 – 4x
= 20x – 2x2 – 40

Note : To avoid the arithmetic errors, when you substitute the values to the Total cost function it is
convenient if you put bracket as in the above equation.
Eg: 2 : The following information is given for you.
 Demand function = 120,000 + 100x
 Variable cost function = 7000x + 1000x2
 Fixed cost = Rs. 900,000/-
By using above information, calculate the Revenue function, Total cost function and
Profit function.

Revenue function = Demand function x x

= (120,000 + 100x) x x
= 120,000x + 100x2

Total cost function = Variable cost function + Fixed cost

= 7000x + 1000x2 + 900,000

Profit function = Revenue function – Total cost function

= 120,000x + 100x2 – (7000x + 1000x2 + 900,000)
= 120,000x + 100x2 – 7000x – 1000x2 – 900,000
= 113000x – 900x2 – 900,000

Marginal revenue functions and Marginal cost functions

 How to calculate Marginal revenue function?

We can calculate Marginal revenue function by differentiating the Revenue function.

Eg: 1 : If the Revenue function is 5x2 + 4x + 2000, Calculate the Marginal revenue function.
Revenue function (R) = 5x2 + 4x + 2000
Marginal revenue function = (5x2) x2-1+ 4x1-1 +0
= 10x + 4 – 0
= 10x + 4

Eg: 2 : If the Demand function is 4x2 + 5x – 3, Calculate the Marginal Revenue function.
To determine the marginal revenue function, we need Revenue function. But here only
demand function is provided. So, first we need to find the revenue function from the
demand function.
Revenue function (R) = Demand function x x
= (4x2 + 5x – 3)x x
= 4x3 + 5x2 – 3x

Marginal revenue function = (4x3)x3-1 + (5x2)x2-1 – 3x1-1 =12x2 + 10x – 3

 Similarly we can calculate the Marginal cost function by differentiating the total cost
function.

Eg: 1 : If the total cost function is x2 – 20x + 1000, Calculate the Marginal cost function.
Total cost function (TC) = x2 – 20x + 1000
Marginal cost function = 2x – 20 + 0
= 2x – 20
Eg: 2 : If the Variable cost function is 5x2 + 4x and fixed cost is Rs. 2000, Calculate the Marginal cost
function.
To determine the marginal cost function, we need total cost function. But here Variable cost
function and fixed cost are provided. So, first we will find the total cost function using
variable cost function and fixed cost.
Total cost function (TC) = Variable cost function + Fixed cost
= 5x2 + 4x + 2000
Marginal cost function = 10x + 4 + 0 = 10x + 4.

Break - even quantity

There are two methods to determine the Break – even quantity.

Method 1

The answers which received from the equalizing to Zero the Profit function or equalizing the Total
cost function with the Revenue function is known as Break – even quantities.

Profit function = 0

or

Total cost function = Revenue function

Eg : If the Total cost function is 300x + 4800 and the Revenue function is –2x2 + 500x, Calculate the
Break – even quantity.
Total cost function = Revenue function Profit function = 0
300x + 4800 = –2x + 500x
2 Revenue function – Total cost function = 0
2x2 - 500x + 300x + 4800 = 0 –2x2 + 500x – (300x + 4800) = 0
x2 - 100x + 2400 = 0 –2x2 + 500x – 300x – 4800 = 0
x2 - 100x + 2400 = 0
 x = 60 or x = 40  x = 60 or x = 40
Break – even quantities are 60 & 40. Break – even quantities are 60 & 40.

Method 2

Find the Break – even quantity by graphing the Total cost function and the Revenue function in the
same graph.

Eg : Consider the above example. (Hint: Take the values of 20, 40, 60 80, 100 as the values of “x”
for the graph)
Total cost function 300x + 4800 Revenue function –2x2 + 500x
If x = 20  300 x 20 + 4800 = 10,800 If x = 20  –2 x 202 + 500 x 20 = 9,200
If x = 40  300 x 40 + 4800 = 16,800 If x = 40  -2 x 402 +500 x 40 = 16,800
If x = 60  300 x 60 + 4800 = 22,800 If x = 60  -2 x 602 + 500 x 60 = 22,800
If x = 80  300 x 80 + 4800 = 28,800 If x = 80  -2 x 802 + 500 x 80 = 27,200
If x = 100  300 x 100 + 4800 = 34,800 If x = 100  -2 x 1002 + 500 x 100 = 30,000
 20 40 60 80 100

Break – even quantities

PROFIT MAXIMUM POINT

How to calculate the Profit maximum point?
There are two Methods of calculating the Profit Maximum point.

Method 1 (By differentiation)

At the maximum point, the first differentiation should be Zero and the second differentiation
should be negative of the profit function.

Eg : If the Total cost function is 300x + 4800 and the Revenue function is –2x2 + 500x, Calculate the
Profit function and the quantity at which the profit is maximized.

Profit function = Revenue function – Total cost function

= –2x2 + 500x – (300x + 4800)
P = –2x2 + 200x – 4800.

Calculating profit maximum point :

first derivative of the profit function should be Zero.
So, = –4x + 200 = 0  4x = 200
x = 50

second derivative of the profit function should be negative.

So, = –4 < 0
Both conditions are satisfied.
x = 50.

Method 2 (By using break – even points)

Eg 1 : If the Total cost function is 300x + 4800 and the Revenue function is –2x2 + 500x, Calculate
the Profit function and the quantity at which the profit is maximized.

At the Break – even point.

Total cost function = Revenue function
300x + 4800 = –2x2 + 500x
2x2 - 500x + 300x + 4800 = 0
x2 - 100x + 2400 = 0  x = 60 or x = 40
Break – even quantities are 60 & 40.
 So, the quantity at which Profit is maximized = = 50 x = 50.

Eg 2 : Weekly profit function of a company is given by P = 1,400x - x2 - 240,000 where x is the

number of units produced per week. How many units to be sold to maximize the weekly
profit?
P = –x2 + 1400x – 240,000 = 0
= –2x + 1400 = 0  2x = 1400  x = 700

= –2 < 0 x = 700.

EXERCISES

01. The variable cost of a manufacturing company is Rs.6/- per unit and the total fixed cost is
Rs.560/-. The total revenue function is given below:
TR = – 2x2 + 30x + 520 where x is the number of units produced.

(i) Find the Profit Function.

(ii) Calculate the quantity at which the profit is maximized using differentiation.

Answer:
(i) Profit function = Revenue function – Total cost function
= Revenue function – (Variable cost function + Fixed cost)
= – 2x2 + 30x + 520 – (6x + 560)
= – 2x2 + 30x + 520 –6x – 560
P = – 2x2 + 24x – 40

(ii) Profit function (P) = – 2x2 + 24x – 40

= – 4x + 24= 0  4x = 24  x = 6

= –4 < 0 x=6

02. One of the machineries of a company is capable of producing a maximum of 10,000 units per
week. The weekly cost to produce “x” No. of units is given by,
TC = 75,000 +100x − 0.03x2 + 0.000004x3
and the demand function for the units is D = 200 − 0.005x
Identify the marginal cost, marginal revenue and marginal profit functions.

Answer:
(i) Total cost function (TC) = 75,000 +100x − 0.03x2 + 0.000004x3
Marginal cost function = = 0 + 100 – 0.06x + 0.000012x2
= 100 – 0.06x + 0.000012x2

(ii) Revenue function (R) = Demand function x x

= (200 – 0.005x) x x = 200x – 0.005x2

Marginal Revenue function = = 200 – 0.01x

(iii) Profit function (P) = Revenue function – Total cost function

 = 200x – 0.005x2 – (75,000 +100x − 0.03x2 + 0.000004x3)
= 200x – 0.005x2 – 75,000 – 100x + 0.03x2 – 0.000004x3
= 100x + 0.25x2 – 75,000 – 0.000004x3
Marginal Profit function = = 100 + (0.25x2)x2-1 – 0 – (0.000004x3)x3-1
=100 + 0.5x – 0 – 0.000012x2
= 100 + 0.5x – 0.000012x2

03. Cost function and revenue function of a company are as follows, where x is the number of
units produced and sold:
TR = 8x , TC = 6x + 1,400
Calculate the break-even number of units.
Answer:
(i) At the Break – even point,
Total cost function = Revenue function
6x + 1,400 = 8x
8x – 6x = 1400
2x = 1400  x = 700
04. Calculate the following using the given data below.
(i) Revenue function (ii) Total cost function
(iii) Profit function (iv) Marginal Revenue function
(v) Marginal cost function (vi) Break – even point

Demand function = 3x + 7
Variable cost function = 3x2 – 3x
Fixed cost = Rs. 60/-
Answer:
(i) Revenue function = Demand function x x
= (3x + 7) x x
= 3x2 + 7x

(ii) Total cost function = Variable cost function + Fixed cost

= 3x2 – 3x + 60

(ii) Profit function = Revenue function – Total cost function

= 3x2 + 7x – (3x2 – 3x + 60)
= 3x2 + 7x – 3x2 + 3x – 60
= 10x – 60

(iv) Marginal Revenue function = = 6x + 7

(v) Marginal cost function = = 6x – 3

(vi) Break even point  Revenue function = Total cost function

3x2 + 7x = 3x2 – 3x + 60
10x = 60
 x=6