5.

14 PARTA: BUSINESS MATHEMATICSs

is
a tunction of price, function of quantity produced and so on. Marti.
cost is a
analysis uses differentiation to get answers to various queries. In this section
wll look al some important economic functions and how they utilize the conee We
of differentiatio.

5.6 AVERAGE COST AND MARGINAL COST

Let the total cost of producing and marketing x units of a product be represente
by the function C= f(1). Then the average cost (AC) can be calculated by dividin

the total cost with the total production, i.e., AC =

The marginal cost (MC), which represents the additional cost of producing and
marketing one extra unit can be defined as the rate of change of cost (C) with respect

to x, ie., MC = dC
dx

Example 12: The total cost C(x) of a firm is: C(x) = 1500+ 30x + x, where xis the outpt

Determine:
() The average cost,
(it) The marginal cost,
(iit) The marginal cost when 20 units are produced,

(iv) The actual cost of producing twenty first unit.

(Delhi Univ. B.Com (P)2008, 2012, 2016)
Solution: The total cost of the firm is given as: C(x) = 1500 + 30x +x2

The average cost AC = = 500+30x +x2 1500+ 30+x

()

(i) The marginal cost MC = 3 0 + 2x (Differentiating C with respect to x)

(iit) The marginal cost when 20 units are produced is: (MC),- 20 30 +2(20) =70
(iv) The actual cost of producing the twenty first unit: C(21) - C(20)

[1500 + 30(21) + (21P1-[1500+30(20) +(20)*1

2571 - 2500 = 71

units of total of r - 18x2+ 160x. Fm

Example 13: A firm produces x output at a cost

at which marginal cost is minimum.

() Output
(in Output at which average cost is minimum.

Solution:Total Cost Function C()= {r- 1812+ 1601

 CH.5:
APPLICATIONS OF DIFFERENTIATIOON 5.15
dC
ost(MC)
(MC) =
* - 36x+ 160
larginal
(Differentiating Cwith respect to )
Arerage Cost (AC) = Cl)- x-18? 4 160x = - 18x+ 160
3x

For marginal coSt to be minimum, the following conditions

should be met:
d(MC)=0 and (MC)>0[Refer Second Derivative Test for Maxima/Minina

d
4(MC)=2x-36=0 x = 18

a (MC) =2 which is>0

d
Hence, output at which nmarginal cost is minimum is 18 units.

() For average cost to be minimum:(AC)= 0and(AC)>0

dr2

(AC) x- 18 = 0 = 27

(AC)= which is >

average cost is minimum

is 27 units.
Hence, output at which
C 0.1x*-3x2 +
function of a manufacturing company given by:
is =

Example 14: The cost zero. Also verify that

AC MC at =

the value at which the slope of average cost is

60x. Find Univ. B. Com (P) 2010] Delhi
this value of x.
0.1x3 - 32 +60x
Solution: Given: C
=

60xa1.2
C0.1x-3x +60x =0.1-3x+60
.

C 0.lr -3x+
=

Average Cost AC
=

d 0.2x-3
Slope ofthe AC is given by (AC)=

Thus,when(AC) =0, we have

dx
0.2 x-30 or x= 15
cost will be
zero.

the slope of
average
nus, when x =
15, 37.5
(15)-3 (15) +60
=

=0.1
nen x= 15, [AC),
Marginal Cost =
= 0.3x2 -

6x + 60
dx
60= 37.5
0.3 (15) -
6 (15) +
15, [MC
=
x=
C = AC.
hCe, when x = 15: MC
5.16 PARTA: BUSINESS MATHEMATICS

Example 15: Acompany produces X units of output at a total cost

ofX3- 12 X2 +2
Find: 25X
() Output at which marginal cost is minimum.
(it) Output at which average cost is minimum.
(i) Output at which marginal cost is equal to average cost.

Delhi Univ. B. Com (P) 2014

Solution: Given: C(X) = X3-12 X2 + 25X

Marginal Cost Function MC(X) =CC (X) = 2X- 24X +25

AVerage Cost Function ACC)= CX)_ 3-12X* +25X

X X =X-12X+25
() For Marginal Cost to be minimum: (MC) = 0 and (MC)>0
ax

(MC)= 4X- 24 Putting d (MC) = 0, we get: 4X - 24 = 0 or X = 6

dx

d
(MC)=4>0
dx
Output at which Marginal Cost is minimum = 6 units

(i) For Average Cost to be minimum: (AC) = 0 and (AC) > 0

dx

d(AC)-X- 12 Putting(AC)=0, we get: x - 12 = 0 or X =9

(AC)=0
Output at which Average Cost is minimum = 9 units
(ii) Let's equate MC and AC to get the corresponding output.

MC AC2x* - 24X + 25=X- 12 X+ 25

3

x = 12X X= 12 or X = 9

Thus, the Marginal Cost and Average Cost would be equal when output = 9 units.

Example 16: The total cost in rupees for a particular product is given by
TC(x) = s-21x + 360x +3,025

where x represents the number of units produced. Determine:

 CH. 5: APPLICATIONS OF DIFFERENTIATION 5.17
cost of the tenth unit
aThemarginal
lss 11Umber of units tor whiclh the
marginal cost is minimumn.
(i)
The minimum marginal cost.

T h e total cost and average cost for the number of units which minimizes the
11nargnal c o s t .
[Delhi Uuiv. B. Com (P) 2017]
dalution : TC (X) -

21x+360r +3.025

AC(1)=
TCCx)
< 2 *-21x2+360ra
x-21x +360x 3,025
+3 3025
2-21x+360 +
=
Cost
Average X

Now, Marginal Cost MC(x) = T TC(1)=3x2 - 42x +360.

dx (1)

(Marginal Cost for the tenth unit =3(9)2 - 42(9) + 360 243 378 +360= 225
Note: Marginal cost of 10th unit means the cost to produce of one additional unit
after 9 units have been produced. The actual cost of producing one more unit after
9th unit would be different (TC TCG).
(i) To find the number of units for which the marginal cost is minimum, we differentiate
MC(x) with respect to x.

MC() =
6x -

42

For MC(x) to be minimum, MC(x) = 0 and d2 MC(x)>0

Putting MC(1) =0 we get: 6x = 42 or x = 7

d2
Further, MC(x) = 6>0
d2

Marginal Cost is minimum when x =7 units

(ii) Minimum Marginal Cost can be obtained by putting x =
7 in Equation (1)
(MC),= 3(7)2 - 42 (7) +360 = 147 - 294 + 360 213

9) (7C)= (7)*- 21(7)2+ 360 (7) + 3025 343-1029 + 2520 +3025 = 4859

(AC),=(7)2- 21(7) + 360 + s = 49 - 147 + 360 + 432.14 = 694.14

7
5.18 PART A: BUSINESS MATHEMATICS

Relationship between Average and Marginal Costs

MC
AC
Marginal cost

Average cost

Output

d When the average cost curve is sloping downward,

(AC) <0. This implies
[MC AC]<0 ie., MC < AC.
Whenever average cost (AC) is decreasing, marginal cost is less than average cost.
AC then MC <AC

(2) When average cost is the minimum, i.e.,

(AC) =
0. This implies:
[MC - AC] =0 ie., MC = AC

Whenever average cost (AC) is minimum, marginal cost is equal to the average cost.
MC AC (when AC is minimum)
(3) When the average cost curve is sloping upward, " (AC)>0. This implies:
[MC AC]> 0 ie., MC> AC.
Whenever average cost (AC) is increasing, marginal is
cost more than average COs.
AC T then MC> AC

5.7 AVERAGE REVENUE AND MARGINAL REVENUE

Total revenue reters to thetotal sale proceeds of a firm by
selling its total output
a given price. Thus, total revenue R trom the sale of x units of a product at a p~ orice

o fp per unit is given by R =px.

 CH. 5: APPLICATIONS OF DIFFERENTIATION 5.19

Devenue (AR) IS the revenue per unit of the commoditv sold. It is obtained
A v e r a g eR e r

iing the
the tot,
total revenue by the number of units sold i.e., AR = .Since, R=
dividing
by
,
follows
follows that AR =p. Thus, average revenue is same as the price per unit.
then

p,
(MR) is the addition to total revenue by selling one more unit of
nal Revenue (M
arg1dity. It is detined as the rate of the change of total revenue vith respect
the commodit

thentity demanded. In other words, marginal revenue is the derivative of R with

t o q u a n t i t y

rSpect to N.

dR
MRdx
and
Relationship between Average Marginal Revenue
revenue under
and total
t Us
Let
Consider the relationship between marginal, average
competition and under imperfect competition.
pure
Under Pure competition:

conditions exist under pure competition:

The following
number of frms are assumed to be present.
( A very large in the market
collective forces of demand and supply determine the priceother words, p
(n The In
one price tends
to prevail for the whole industry.
so that only
on x.
is not dependent the firm can sell any
amount of
and
the firm is a 'price-taker' firm sells m o r e and
more
(i) In simple terms, market price. As the
wishes at the prevailing rate of increase
in the
output it r e v e n u e will
increase but the
its total c a n say that
at the given price, MR and AR p, we
=
Since AR =

be constant.
total r e v e n u e will
competition, MR=p.
underpure
Under Monopoly:
under monopoly:
conditions exist
The following substitute for the seller's product.
there is no
seller and must lower
its price to
There is only o n e The firm
( on price and vice
versa.

curve is downward sloping

Demand is dependent revenue
situation:
) average
Therefore, the lies below it.
In such a
Sell more quantity. revenue
curve

marginal
corresponding rule).
and it's
M R = p t *(By
the product
px, but p depends
on a:. Therefore
Find:
is given byp=
1000 -

3x-
monopolist
function of a
demand
p l e 17: The

Function
Revenue
() The Function
Revenue

(1) The Marginal = l10

when x
Revenue

) The Marginal
5.20 PARTA: BUSINESS MATHEMATICS

Solution:
() Revenue function R= px=x (1000 3x- x) = 1000x -3 x2 - x

(i) Marginal Revenue Function MR = = (1000x-3 x- s ) = 1000-6x.3.

dx
(ii) Marginal Revenue when x= 10: (MR),-10 1000 60 - 300 = 640

Example 18: The demand function of a product for a manufacturer is p= ar + b H

knowsthat he can sell 1000 units when the price is 6 per unit and he can sell 1500 unit
at a price of T 5 per unit. Find the
following
() total revenue function.
(i1) average revenue function.
(iin marginal revenue function.
(11v) price per unit when the marginal revenue is zero.
Solution : Given, demand function ax + b when
p= x = 1000, p=6; when x =1500, p=5
Thus, we have the following two equations:
1000 a + b= 6 (1)
1500 a +b=5 .2)

Solving the above two equations, we get a= - 1 and b=8

500

Hence the demand function is p= 8B-.

500

() Total Revenue Function is: R= p A=8 8x

500

(i) Average Revenue Functionis: AR R 8 500

(ii) Marginal Revenue Function is MR =

8
dx 250
(iv) When MR= 0, we have 8 - s = 0 x= 2000.

When x= 2000, we can find the price by substituting this value in the demand functio
2000
=8-

500
= 8 -4=4
Thus, at a price of R 4 per unit the marginal revenue vanishes.

Example 19: The demand function for a manufacturer's product is x = 80- 4p, wherex
the number of units and p isthe price per unit. At what value of x will there be maximu
revenue? What is the maximum revenue?
 CH.5:APPLICATIONS OF DIFFERENTIATION 5.21
aul : Demand nction is given as: x= 80- 4p.
Solution: D
o-r
p=
gives: 4
This

yenue
function is: R =px= | o0 = 80x-x

maximum revenue, we will make use of the second derivative rule.

ad the

dR(80- 21); Further, 0 gives x = 40

taking the
second derivative of R: R) =
(-2) <0
Now d2
at x = 40.
second derivative Is negative, for maximum revenue

Since the

80x40-(40)
is 8UX40-40)- 400
of the maximum
revenue
4
The value
400.
revenue would be at x = 40 and it's value is
maximum
So, the

PROPENSITY TO CONSUME (MPC)

5.8 MARGINAL small change in the
measures the proportion of a
to of being saved. This
consume

Marginal propensity consumption instead

that would be spent
on
we c a n
disposable income o u r customer's MPC,
because if we know
useful in business, the
concept is very dividing the change in consumption by
is computed by
strike a better deal. MPC
income that
caused it. Thus,
change in disposable
=

to Consume (MPC)
Marginal Propensity
income.
consumption
and Irepresents
to save
Te Crepresents
marginal propensity
S = l - C The
S, then
represented by to I. Thus,
NOWif savings a r e of change of S with respect
rate
r ) I s defined as the

(MPS) = =1.
arginal Propensity to Save to income.
with respect
MPSndicates how fast savings change
determine the
by C=5 +51+3NI ,

function is given
consumption
ple 20:If the
following when I= 36
to consume
Marginal propensity
save
to
(i) Marginal propensity
 5.22 PARTA: BUSINESS MATHEMATICS

Solution : Marginal propensity to consume 3

When I =36, d
= 2+ 3
2 36 -+- 0.75
Themarginal propensity to save when I =
36 is: 1 -

0.75 =
0.25
REVIEW EXERCISE 5.2
1. The total cost
C(x) of a firm is: C(x)= 2+5x 10 where
+ x is the output, Dete
() The average cost,
(i) The marginal cost,
Determine
(ii) The marginal cost when 10
units are
(iv) The actual cost of produced,
producing eleventh unit.
2. If the total cost function of
a product is given by C(x)= +7
marginal cost falls continuously as the 2x| 7, prove
that the
3. The output rises.
manufacturing cost of product consists of R
a
5000 as ixed cost, 7 4
material cost and labour 2 per unit of
cost of for x units
units to be produced. Compute the number of
4. The total
produced so that the
average cost is
cost function minimum.
where "" is the of a product is given by C(x)
number of units = - 1502 +
be
produced to minimize the totalproduced. Determine the number of 5625x 10,000 +

5. The cost. units that must

demand function of
revenue function and (ii)
a
product is given by p= 4000
6. marginal revenue, when x= 25. 20x-x?. Find (i) marginal
The demand function of a
() The revenue monopolist is given by p=2000 3x-2
function, Find the following
-

(ii) The marginal

revenue function,
(iii) The marginal
7. A revenue when x= 10.
monopolist's demand function is
(i) The p= 500 5x. Find the
marginal revenue function.
-

(i) The price following:

at which
8. For the marginal revenue is zero.
demand function 5
p =

3+X show that the

increasing function. marginal revenue
9. On funcuo
studying the demand of
function is linear. Data a
product at different
priced at R 5 per unit andcollected showed that it can prices, a firm found that the
if the
price is reduced to further that the sell 600 units
when t
(i) the total revenue R 4 quantity
per unit. Given that can be sold
the
pa00
function and (ii) the the above, find () the goes up to oo
marginal revenue demand tu
function.