Marginal Revenue and Marginal Cost Practice Question

Human hand reaching for money
Hand reaching for money. alicemoi / Getty Images

In an economics course, you will likely have to calculate measures of costs and revenue on homework problem sets or on a test. Testing your knowledge with practice questions outside of class is a good way to ensure you understand the concepts.

Here is a 5-part practice problem that will require you to calculate total revenue at each quantity level, marginal revenue, marginal cost, profit at every quantity level and fixed costs.

Marginal Revenue and Marginal Cost Practice Question

Marginal Revenue and Marginal Cost - 1
Marginal Revenue and Marginal Cost Data - Image 1.

 You've been hired by Nexreg Compliance to calculate measures of costs and revenue. Given the data they have provided you with (see table), you are asked to compute the following:

  • Total Revenue (TR) at each Quantity (Q) level
  • Marginal Revenue (MR)
  • Marginal Cost (MC)
  • Profit at every quantity level
  • Fixed Costs

Let's go through this 5-part problem step-by-step.

Total Revenue (TR) at Each Quantity (Q) Level

Marginal Revenue and Marginal Cost - 2
Marginal Revenue and Marginal Cost Data - Image 2.

Here we are trying to answer the following question for the company: "If we sell X units, what will our revenue be?" We can calculate this by the following steps:

If the company does not sell a single unit, it will not collect any revenue. So at quantity (Q) 0, total revenue (TR) is 0. We mark this down in our chart.

If we sell one unit, our total revenue will be the revenue we make from that sale, which is simply the price. Thus our total revenue at quantity 1 is $5, since our price is $5.

If we sell 2 units, our revenue will be the revenue we get from selling each unit. Since we get $5 for each unit, our total revenue is $10.

We continue this process for all the units on our chart. When you've completed the task, your chart should look the same as the one to the left.

Marginal Revenue (MR)

Marginal Revenue and Marginal Cost - 3
Marginal Revenue and Marginal Cost Data - Image 3.

Marginal revenue is the revenue a company gains in producing one additional unit of a good.

In this question, we want to know what the additional revenue the firm gets when it produces 2 goods instead of 1 or 5 goods instead of 4.

Since we have the figures for total revenue, we can easily calculate the marginal revenue from selling 2 goods instead of 1. Simply use the equation:

MR(2nd good) = TR(2 goods) - TR(1 good)

Here the total revenue from selling 2 goods is $10 and the total revenue from selling only 1 good is $5. Thus the marginal revenue from the second good is $5.

When you do this calculation, you'll note that the marginal revenue is always $5. That's because the price you sell your goods for never changes. So, in this case the marginal revenue is always equal to the unit price of $5.

Marginal Cost (MC)

Marginal Revenue and Marginal Cost - 4
Marginal Revenue and Marginal Cost Data - Image 4.

Marginal costs are the costs a company incurs in producing one additional unit of a good.

In this question, we want to know what the additional costs to the firm are when it produces 2 goods instead of 1 or 5 goods instead of 4.

Since we have the figures for total costs, we can easily calculate the marginal cost from producing 2 goods instead of 1. To do this, use the following equation:

MC(2nd good) = TC(2 goods) - TC(1 good)

Here the total costs from producing 2 goods is $12 and the total costs from producing only 1 good is $10. Thus the marginal cost of the second good is $2.

When you've done this for every quantity level, your chart should look similar to the one to the left.

Profit at Every Quantity Level

Marginal Revenue and Marginal Cost - 5
Marginal Revenue and Marginal Cost Data - Image 5.

The standard calculation for profit is simply:

Total Revenue - Total Costs

If we want to know how much profit we will receive if we sell 3 units, we simply use the formula:

Profit(3 units) = Total Revenue (3 units) - Total Costs (3 units)

Once you do that for every level of quantity, your sheet should look like the one to the left.

Fixed Costs

Marginal Revenue and Marginal Cost - 5
Marginal Revenue and Marginal Cost Data - Image 5.

In production, fixed costs are the costs that do not vary with the number of goods produced. In the short-run, factors like land and rent are fixed costs, whereas raw materials used in production are not.

Thus the fixed costs are simply the costs the company has to pay before it even produces a single unit. Here we can collect that information by looking at the total costs when quantity is 0. Here that is $9, so that is our answer for fixed costs.

Format
mla apa chicago
Your Citation
Moffatt, Mike. "Marginal Revenue and Marginal Cost Practice Question." ThoughtCo, Oct. 25, 2017, thoughtco.com/marginal-revenue-and-cost-practice-question-1146951. Moffatt, Mike. (2017, October 25). Marginal Revenue and Marginal Cost Practice Question. Retrieved from https://www.thoughtco.com/marginal-revenue-and-cost-practice-question-1146951 Moffatt, Mike. "Marginal Revenue and Marginal Cost Practice Question." ThoughtCo. https://www.thoughtco.com/marginal-revenue-and-cost-practice-question-1146951 (accessed April 20, 2018).