Profit maximization position

In order to determine the profit maximisation position, we need to add the cost of production data.

The following table indicates the cost and revenue data for Funky Chicken:

Table: Cost and revenue data for Funky Chicken

 Quantity (units of fried chicken pieces) Total cost TC (rand) Total revenue TR (rand) Marginal cost MC (rand) Marginal revenue MR (rand) 0 62 0 --- --- 10 90 40 2,80 4,00 20 110 80 2,00 4,00 30 126 120 1,60 4,00 40 144 160 1,80 4,00 50 166 200 2,20 4,00 60 192 240 2,60 4,00 70 224 280 3,20 4,00 80 264 320 4,00 4,00 90 324 360 6,00 4,00 100 404 400 8,00 4,00

Column 1 indicates the quantity of fried chicken pieces. The total cost to produce these quantities is provided in column 2, while the total revenue from selling these quantities is provided in column 3. Column 4 indicates the marginal cost and column 5 the marginal revenue.

Study the above table and answer the following questions:

Which one of the following correctly describes what is happening to marginal cost as more is produced?

Think again. What we see is that marginal cost eventually increases at an increasing rate (1,6; 1,8; 2,2; 2,6; …). This is due to the law of increasing costs.

Correct. What we see is that marginal cost eventually increases at an increasing rate (1,6; 1,8; 2,2; 2,6; …). This is due to the law of increasing costs.

Think again. What we see is that marginal cost eventually increases at an increasing rate (1,6; 1,8; 2,2; 2,6; …). This is due to the law of increasing costs.

Think again. What we see is that marginal cost eventually increases at an increasing rate (1,6; 1,8; 2,2; 2,6; …). This is due to the law of increasing costs.

Which one of the following correctly describes what is happening to marginal revenue as more is produced?

Correct. Marginal revenue remains constant and is equal to the price of R4.

Think again. Marginal revenue remains constant and is equal to the price of R4.

Think again. Marginal revenue remains constant and is equal to the price of R4.

Think again. Marginal revenue remains constant and is equal to the price of R4.

To determine at which output level Funky Chicken maximises its profits, we can use the rule that profit maximisation occurs where marginal revenue equals marginal cost (MR = MC).

According to the data for Funky Chicken, this occurs at an output level of 80. This is also the point where the difference between total revenue and total cost is the greatest, as indicated in the following table:

Table: Revenue and cost

 Quantity (units of fried chicken) Q Total cost TC (rand) Total revenue TR (rand) Marginal cost MC (rand) Marginal revenue MR(rand) Profit TR-TC (rand) 0 62 0 --- --- -62 10 90 40 2,80 4,00 -50 20 110 80 2,00 4,00 -30 30 126 120 1,60 4,00 -6 40 144 160 1,80 4,00 16 50 166 200 2,20 4,00 34 60 192 240 2,60 4,00 48 70 226 280 3,40 4,00 54 80 264 320 4,00 4,00 56 90 324 360 6,00 4,00 36 100 404 400 8,00 4,00 -4