EMBA Induction Session 3

Induction on
Preliminary Econometrics
(Basics on the Use of Mathematics on Economics)
Ace Institute of Management
Executive MBA Program
Session 3
Economic Application: Microeconomics
Instructor
Sandeep Basnyat
Sandeep_basnyat@yahoo.com
9841 892281
Calculus in Managerial Economics

Marginal Applications
Q
Marginal Product of the Labour (MPL) = L
TR
Marginal Revenue (MR) = Q
TC
Marginal Cost (MC) = Q
MPL can be obtained by finding first derivative of Q
(Total Product) with respect to Total Labour.
MR is found by differentiating TR with respect to Q
MC is found by differentiating TC with respect to Q
Exercise
Assume a cost function:
TC = 150Q 20Q2 +Q3
Find the Marginal cost for this function.
Ans:
2 +Q3)
d(150Q
20Q
d(TC)
MC = ____ =
dQ
dQ
MC = 150 40Q + 3Q2
Exercise
Given the cost function:
TC = 1000 + 10Q - 0.9Q2 + 0.04Q3
Find: MC, TVC, AVC functions
TC = 1000 + 10Q - 0.9Q2 + 0.04Q3

1) MC
= 10-1.8Q+ 0.12Q2
2) TVC
= 10Q - 0.9Q2 + 0.04Q3
3) AVC
= 10 - 0.9Q + 0.04Q2
Exercise
Suppose the Total Cost function (TC) = 500 + 20Q2
Total Revenue function (TR) = 400Q 20Q2
Find MC and MR functions.
MR = dTR / dQ = 400 - 40Q
MC = dTC / dQ = 40Q
Exercise
Suppose the Total Cost function (TC) = 500 + 20Q2
Total Revenue function (TR) = 400Q 20Q2
Assume that MC and MR are equal for this firm. How
much quantity (Q) will be produced at that level?
40Q = 400 - 40Q
Q = 5 units.
At, Q = 5, how much is

a) Total Revenue
b) Total Cost
c) Total Profit
d) Per unit selling Price
1500
1000
500
300
Exercise
Assume that demand function for a firm is:
P = 14 2Q. Find TR and MR for this firm.
TR = (14 2Q)Q = 14Q 2Q2
MR = 14 4Q
Assume that the firm has constant MC = 2. At the

level where MC = MR, find total quantity produced.
Q=3
At Q = 3, find: P, TR, TC and Profit.

P = 8;
TR = 24;
TC = 6;
Profit = 18
Economic Applications
Profit Maximization
Revenue Maximization
Average Total Cost or Average Cost
Minimization
Equilibrium and disequilibrium in the
economy and its firm
Changing demand and supply
Profit Maximization
One of the most important objectives of an
organization.
Profit = Total Revenue Total Cost
Big question: How can we maximize the
overall level of profit?
a) By charging maximum price? Or
b) By producing maximum quantity? Or
c) By producing optimum quantity?
Profit Maximization
If increase Q by one unit,
revenue rises by MR,
cost rises by MC.
If MR > MC, then increase Q to raise profit.
If MR < MC, then reduce Q to raise profit.
What Q maximizes the firms profit?
Profit Maximization
At any Q with
MR > MC,
increasing Q
raises profit.
At any Q with
MR < MC,
reducing Q
raises profit.
Profit =
Profit MR MC
TR
TC
$0
$5
$5
10
20
15
30
23
40
33
50
45
MR MC
$10
$4
$6
10
10
10
10
10
12
Firms maximize profit by producing the Quantity until
MR = MC
Exercise
Assume a cost function: TC = 1000 + 2Q + 0.01Q2 and a constant
marginal revenue $10 per unit for a firm.
a) Calculate the profit maximizing output (Q); and
b) Total profit if the selling price per unit (P) = MR.
Solution:
a) MC = dTC /dQ = 2+0.02Q
Profit maximizing output is at where
MR = MC
10 = 2+0.02Q
Therefore, Profit Maximizing Quantity (Q) = 400 units.
b) Profit = TR TC = [(PxQ) TC]
= [(10x400) (1000 + 2(400) + 0.01(4002)] = $600
Exercise
Assume the following functions for a firm
Demand :
P = 7,500 3.75Q
Total Cost:
TC = 1,012,500 + 1,500Q + 1.25Q2
Find the profit maximizing Quantity for this firm.
Q = 600 units.
At Q = 600, find:
a)Price per unit P = 5,250
b)Total Revenue TR = 3,150,000
c) Total Profit
= 787,500
Exercise
Demand :
P = 20 - Q
Total Revenue: TC = Q2 + 8Q + 2
Find the followings for this firm.
a)Profit maximizing Quantity Q = 3
b)Price per unit
P = 17
c) Total Revenue
TR = 51
d)Total Profit
= 16
Exercise
Demand :
Q = 90 2P
Total Revenue: TC = Q3 - 8Q2 + 57Q + 2
a)Profit maximizing Quantity Q = 4
b)Price per unit
P = 43
=6
c) Total Profit
Sales Revenue or
Revenue Maximization
Q
TR
AR
MR
$4.50
$0
n.a.
4.00
$4.00
$4
3.50
3.50
Sales
Revenue
Maximization
Condition
3.00
3.00
MR = 0
2.50
10
2.50
2.00
10
2.00
1.50
1.50
Exercise
Demand :
P = 7,500 3.75Q
Total Cost:
TC = 1,012,500 + 1,500Q + 1.25Q2
a)Revenue maximizing Quantity Q = 1000 units.
P = 3,750
b)Price per unit
c) Total Revenue
TR = 3,750,000
= - 12,500
d)Total Profit / Loss
Exercise
Demand :
P = 4,000 20Q
Total Cost:
TC = 2000 + 400Q
Find the followings for this firm under
(a) Profit maximization objective
(b) Revenue Maximization objective.
i) Maximizing Quantity
ii) Price per unit
iii) Total Profit / Loss
Profit
90
2200
1,60,000
Revenue
100
2000
1,58,000
Exercise
Assume that you have written a new Economics textbook. The
publisher has offered you the following contract options for
royalty payment.
a) 10% of Total Revenue; or
b) 15% of Total Profit
The publishers total revenue and total cost functions are as
follows:
Total revenue :
TR = 10,000Q 5Q2
Total Cost:
TC = 10,000 20Q + 5Q2
(a) If you are a profit maximizer, which contract should you
choose?
(b) If you are a revenue maximizer, which contract should you
choose?
Solution to previous exercise

a) Profit Maximization case:
Royalty from 1st contract (10% of TR): 375,499.5
Royalty from 2nd contract (15% of ): 375,001.5
Decision: Choose the 1st contract
a) Revenue Maximization case:
Royalty from 1st contract (10% of TR): 5,00,000
Royalty from 2nd contract (15% of ): 1500
Decision: Choose the 1st contract
Average Total Cost or Average Cost

Minimization
Related to two important costs: MC and ATC
Recall:
ATC = AFC + AVC or TC / Q
TC
MC =
Q
Marginal Cost
TC
0 $100
1
170
220
260
310
380
480
620
Marginal
Cost (MC)
$200
is
the change in total cost from
$175
producing one more unit:
MC
$70
50
40
$150
Costs
$125
$100
50
$75
70
$50
100
$25
140
MC =
TC
Q
$0
0
4
Q
Average Total Cost Curves

TC
0 $100
1
2
170
220
ATC
$200
$175
n.a.
$150
$170
110
$125
Costs
$100
260
86.67
310
77.50
380
76
$25
480
80
$0
620
88.57
$75
$50
4
Q
Important Economic Relation: ATC and MC

When MC < ATC,
ATC
MC
$200
ATC is falling.
$175
When MC > ATC,
$150
ATC is rising.
The MC curve crosses the
ATC curve at
the ATC curves minimum.
Costs
$125
$100
$75
$50
ATC is minimum where,
ATC = MC
AVC is minimum where,
AVC = MC
$25
$0
0
4
Q
Exercise
Given the cost function:
TC = 1000 + 10Q - 0.9Q2 + 0.04Q3
Find:
1) MC, TVC, AVC functions (equations)
2) Find Q when AVC is minimum.
Worked out Solution

TC = 1000 + 10Q - 0.9Q2 + 0.04Q3
1) MC = TC / Q = d(TC) / dQ
= 10-1.8Q+ 0.12Q2
2) TVC = TC TFC
= 1000 + 10Q - 0.9Q2 + 0.04Q3 1000
= 10Q - 0.9Q2 + 0.04Q3
3) AVC = TVC / Q =(10Q - 0.9Q2 + 0.04Q3 )/Q
= 10 - 0.9Q + 0.04Q2
4) Q at Minimum AVC is:
AVC
= MC
10 - 0.9Q + 0.04Q2
= 10-1.8Q+ 0.12Q2
Or, - 0.08Q2 + 0.9Q
=0
Or, Q(- 0.08Q+ 0.9)
=0
Or, Q =0 and - 0.08Q+ 0.9 = 0 i.e, Q = 11.25 (Minimum AVC)
Exercise
Demand :
P = 7,500 3.75Q
Total Cost:
TC = 1,012,500 + 1,500Q + 1.25Q2
Find the followings for this firm if your objective is
to minimize average cost.
a) Q
Q = 900
b) Price per unit P = 4,125
c) Total Revenue TR = 3,712,500
d) Total Profit = 337,500
Thank You

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Induction on

Calculus in Managerial Economics

MC = 150 40Q + 3Q2

TC = 1000 + 10Q - 0.9Q2 + 0.04Q3

At, Q = 5, how much is

Assume that the firm has constant MC = 2. At the

At Q = 3, find: P, TR, TC and Profit.

Firms maximize profit by producing the Quantity until

Solution to previous exercise

Average Total Cost or Average Cost

Average Total Cost Curves

Important Economic Relation: ATC and MC

When MC > ATC,

ATC is minimum where,

Worked out Solution

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