3. Problems and Applications Q3 Johnny Rockabilly has just finished recording hi

Question

3. Problems and Applications Q3
Johnny Rockabilly has just finished recording his latest CD. The company can produce the CD with no fixed cost and a variable cost of $18 per CD. His record company's marketing department determines that the demand for the CD is as follows:
Complete the following table by computing total revenue for each quantity listed and marginal revenue for each 5,000 increase in the quantity sold.

Price
Number of CDs
Total Revenue
Marginal Revenue
(Dollars)
(Dollars)
(Dollars)
30 10,000

28 15,000
26 20,000
24 25,000
22 30,000
20 35,000

Profit is maximized at a quantity of   CDs and a price of   . This results in a profit of
.
If you were Johnny's agent, you would advise Johnny to demand a recording fee of   from the record company.

Explanation / Answer

There is no fixed cost so variable cost is total cost. Total revenue is the product of price and quantity and marginal revenue is the change in revenue divided by change in output. Profit = TR - TC

Profit is maximized at a quantity of 20000 CDs and a price of $26. This results in a profit of $160,000. If you were Johnny's agent, you would advise Johnny to demand a recording fee of $ 160,000 from the record company which is their profit.

P Q TC TR MR MC Profit 30 10000 180000 300000 120000 28 15000 270000 420000 24 18 150000 26 20000 360000 520000 20 18 160000 24 25000 450000 600000 16 18 150000 22 30000 540000 660000 12 18 120000 20 35000 630000 700000 8 18 70000

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