Tom Railbon is an artist He has a particular piece of sculpt

Tom Railbon is an artist. He has a particular piece of sculpture that he makes and sells at local art fairs. He sells the sculpture for $220. Recently he decided it was time to actually do an economic analysis of his business to see how many pieces he should sell to maximize his profit. He came up with the following analysis of his costs:

                                                                Quantity              Total Variable Cost                                        

                                                                       1                                       $200

                                                                       2                                       $380

                                                                       3                                       $540

                                                                       4                                       $720

                                                                       5                                       $920

                                                                       6                                   $1,170

                                                                       7                                   $1,470

In addition to the variable costs, he also figures he has $100 in fixed costs. Using that information complete the following table:

Quantity    Total Variable Cost   Total Cost       Marginal Cost    Total Revenue      Marginal Revenue                                                                        

       1                       $200

       2                       $380

       3                       $540

       4                       $720

       5                       $920

       6                     $1,170

       7                     $1,470

Now, using the Marginal Cost and Marginal Revenue, explain what quantity Tom should produce to maximize his profit.

Solution

Price per sculpture = $220

Fixed Cost = $100

Following is the complete table -

TC

(TVC+TFC)

TR

(P*Q)

MC

(TC_n - TC_n-1)

MR

(TR_n - TR_n-1)

According to Marginal revenue-Marginal cost concept, a firm maximizes its profit when it produce that level of output at which marginal cost is equal to marginal revenue or marginal revenue is greater than marginal cost and further increase in output results in marginal cost becoming greater than marginal revenue.

Above table clearly depicts that upto production of 5 pieces of sculpture, marginal revenue is greater than marginal cost. However, further increase in production that is production of 6th unit results in marginal cost becoming greater than marginal revenue.

So, the profit-maximizing quantity for Tom is 5 pieces of sculpture.

Thus, the quantity that Tom should produce to maximize his profit is 5 pieces of sculpture.