Download Production Decisions Worksheet—Answer Notes

Production Decisions Worksheet—Answer Notes
Tubby's Plumbing Company specializes in installing hot tubs. There is usually enough
local business that the company can install a couple hot tubs a day without traveling
very far to do so. If they want to do more business in a day, however, they have to
travel increasingly far for each installation, incurring higher costs in terms of employee
time and gasoline. The total and marginal costs associated with various daily output
levels is described below.
(1)
Quantity of Output
(Number of
Installations)
(2)
Marginal
Cost ($)
(3)
Total Cost
($)
(4)
Marginal
Revenue (=
Price) ($)
(5)
Total Revenue
($)
(6)
Total Profit
($)
0
1
2
3
4
5
-30
30
40
60
90
30
60
90
130
190
280
-60
60
60
60
60
0
60
120
180
240
300
-30
0
30
50
50
20
h. At what level of production is profit the highest? (If two levels are tied, state the
higher one.) What is happening in GRAPH 2 at this level of production?
At an output level of 4 installations. The Marginal Cost (MC) and Marginal
Revenue (MR) curves cross at this level of output. (If you followed the Technical
Note, you will see that the curves actually cross between the two levels that give
the same amount of maximum profit.)