Production Decisions Worksheet (Considering Both Costs And Revenues, What Level Of Production Will Maximize Profits

Production Decisions Worksheet (Considering Both Costs and Revenues, What Level of Production Will Maximize Profits?)

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) / (2) / (3) / (4) / (5) / (6)
Quantity of Output (Number of Installations) / Marginal Cost ($) / Total Cost ($) / Marginal Revenue (= Price) ($) / Total Revenue ($) / Total Profit ($)
0 / -- / 30 / --
1 / 30 / 60
2 / 30 / 90
3 / 40 / 130
4 / 60 / 190
5 / 90 / 280

a. Graph Tubby's Total Cost Curve in GRAPH 1 of the graphing worksheet

b. Graph Tubby's Marginal Cost curve in GRAPH 2 of the graphing worksheet. (Technical Note: Plot the points on the segments between the horizontal axis values. For example, the marginal cost of going from zero installations to one installation should be graphed above an “x-value” of .5).

c. Tubby's Plumbing is a "price taker." For each installation, the company is paid $60. Fill in Column (4) with the marginal revenue corresponding to each additional unit of output, and Column (5) with the total revenue (= price ´ quantity of output) corresponding to each level of output.

d. Graph Tubby's Total Revenue Curve in GRAPH 1 of the graphing worksheet

e. Graph Tubby's Marginal Revenue curve in GRAPH 2 of the graphing worksheet. (Technical Note: Plot the points on the segments between the horizontal axis values.)

f. How much profit (= total revenue – total cost) does Tubby's make at each level of production? Fill in column (6)

g. Graph Tubby's level of profit corresponding to each level of production in GRAPH 3 of the graphing worksheet.

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?