Question

a. (10 points) Create a line graph for total revenue and total cost. i. Why does revenue have the shape that it has? Does it make sense that there would be a peak in total product and thus in total revenue? ii. Where does it appear that there is the greatest difference between total revenue and total cost? iii. At what point does it appear that the firm experiencing break-even?

Total Revenue and Total Cost 12000 10000 8000 6000 4000 T2000 1 2 3 4 5 6 7 89 10 11 12 13 14 15 16 17 18 19 20 21 22 2324 25 2000 4000 -6000 Labor Input Total Revenue-Total Cost

Answer 1

The line graph is already provided.

(a) Total revenue (TR) curve is initially increasing, reaching a maximum and then decreasing. This is the result of a downward sloping demand curve in which as price rises (falls), quantity demanded falls (rises). Therefore, initially TR rises with increase in quantity demanded, but after the maximum point, starts falling as more units are produced.

There is a peak in total product (TP) and TR curves because of law of diminishing returns. In context of TP, this means that as more of the variable input is added to production, eventually production rises by decreasing amount. In context of TR, it means that as more output is produced, eventually revenue starts falling with addition of more output.

(b) Vertical distance between TR and TC appears to be highest when Q is 12 units and 13 units.

(c) In break-even, TR and TC intersect which occurs when output is 21 units where TR = TC = $4,000.