Acca f5

mark057

I'm having problems calculating marginal revenue and marginal cost on a tabulation question.
Apologies if this might appear clear but I've looked at this problem with the answer and can't understand how its calculated.

Question:
An organisation operates in a market where there are imperfect competition, so to sell more units of output it must reduce the sales price of all the units it sells. The following data is available.

Total Output Sales price per unit (AR) Average cost of output (AC)
(Units) £ £ per unit
0 0 0
1 504 720
2 471 402
3 439 288
4 407 231
5 377 201
6 346 189
7 317 182
8 288 180
9 259 186
10 232 198

The total cost of zero output is £600.

The answer was provided as follows. I've provided an extract of the answer only just to illustrate what I'm struggling with.

Answer:

Unit Price Total rev Marginal rev Total cost Marginal cost
0 0 0 0 600 0
1 504 504 504 720 120
2 471 942 438 804 84
3 439 1317 375 864 60
4 407 1628 311 924 60

What i need to know ideally is there a way of calculaing what the marginal revenue and marginal cost figures are using the data in the question?

Thanks

Mark

mark057

Its not formatted the tabulation properly.

The first set of figures in the question are as follows:

Column 1 - Total output in units
column 2 - Sales price per unit (AR)
Column 3 - Average cost of output (AC) per unit

In the answer the column of figures represent:

Column 1 - Units
Column 2 - Price
Column 3 - Total revenue
Column 4 - Marginal revenue
Column 5 - Total cost
Column 6 - Marginal cost

Rozzi Rainbow

Hi Mark

I understand the marginal revenue - it is the revenue of the additional item sold.

You are told that one item will sell for $504 - this is the MR of the first item.
Two items will sell for $471 each - a total of $942. As the first item on its own would sell for $504, the MR is the extra revenue generated by selling the second item = $942-$504 = $438.
Three items sell at $439 each, a total of $1317 - MR of item 3 = $1317-$942 = $438.
Four items sell at $407 each, a total of $1628 - MR of item 4 = $1628-$1317 = $311

I can't quite get my head around the costs at the moment - will see if I can get back to you.

Rozzi Rainbow

I think I get the costs now:

The first item costs $720, zero items cost $600 therfore the first item alone costs $120.
Two items cost $402 each, making a total of $804. The first one costs $720, therefore the second one alone costs $84. (804-720)
Three items cost $288 each, making $864 in total. MC of the third item = $864-$804 = $60.
Four items cost $231 each, making a total of $924. MC of the fourth item = $924-$864 = $60.