Question 1 of 5
Step 1
Work It Out
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You must read each slide, and complete any questions on the slide, in sequence.
Suppose Margie decides to lease a photocopier and open up a black-and-white photocopying service in her dorm room for use by faculty and students. Her total cost, as a function of the number of copies she produces per month, is given in the table:
Which of the following tables is correct, assuming that Margie can charge 6 cents per black-and-white copy?
3:04
Step 2
How many copies per month should Margie sell?
Correct! If Margie sells 5,000 photocopies per month, then we can see from the table that she will earn the highest profit of $85. Alternatively, profit increases from additional sales whenever MR > MC. This occurs up to 5,000 photocopies per month. When 6,000 photocopies per month are produced MR < MC so profit would decrease.
Sorry! Margie wants to make as much profit as possible so how many photocopies per month should she make? To review how to determine the level of output that will maximize profit, please see the section “What Quantity to Produce?”
2:33
Step 3
If the lease rate on the copier were to increase by $50 per month, Margie’s profit-maximizing level of output would be:
Correct! If Margie sells 5,000 photocopies per month, then we can see from the table that she will earn the highest profit of $85. The amount needed to maximize profits does not change with the higher lease rate since the lease rate is a fixed cost in this situation. Changes in fixed cost do not change marginal cost so the profit maximizing quantity does not change.
Sorry! Margie wants to make as much profit as possible so how many photocopies per month should she make? What type of cost is the lease rate in this situation? To review how to determine the level of output that will maximize profit, please see the section “Entry, Exit, and Shutdown Decisions.”
Step 4
The $50 increase in the lease rate would Margie’s profit.
Correct! Even though Margie still makes 5,000 photocopies per month, the $50 is an increase in fixed cost and will reduce her profits by that amount at every output level. Instead of the $85 in profit made before the lease rate increase, Margie now makes $35. This can be seen in the table below.
Sorry! Margie’s profit maximizing output level may not change, but what about her profit level? Consider recalculating the original table with the higher $50 lease rate. To review how to determine the impact on profits, please see the section “Entry, Exit, and Shutdown Decisions.”
Step 5
When it is time to renew her lease, Margie
Correct! The higher $50 lease rate resulted in a lower profit of $35, but since this profit is greater than zero, it is considered an above normal profit. Firms will only exit the market when they earn a loss.
Sorry! When will a firm decide to exit an industry? Please see thesection “Entry, Exit, and Shutdown Decisions.”