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Chapter 8
Profits and Revenue
Supplemental Instruction
Iowa State University
1. Fill out the Chart:
Term
Accounting Profit
Economic Profit
Formula
= Total Revenue –
Accounting Costs
= Total Revenue – All costs
of production
2. Fill in the Charts:
Total Revenue from Selling T-shirts
Cost of raw materials
Wages and salaries
Electricity and phone
Advertising cost
Investment income forgone
Rent forgone
Salary forgone
Total Explicit Costs
Total Implicit Costs
Accounting Profit
Economic Profit
$300,000
$ 80,000
150,000
20,000
40,000
$ 6,000
4,000
40,000
$290,000
$ 50,000
$10,000
-$ 40,000
Veronica
Econ 101
Kreider
11-4-14
Types of Costs included
Explicit
Explicit & Implicit
Total Revenue of Bakery
Cost of raw materials
Wages and salaries
Electricity and phone
Advertising cost
Investment income forgone
Rent forgone
Salary forgone
Total Explicit Costs
Total Implicit Costs
Accounting Profit
Economic Profit
$545,000
$ 10,000
225,500
16,500
53,000
$ 3,500
6,500
60,500
$305,000
$ 70,500
$240,000
$ 169,500
3. What does the demand curve facing the firm shows us?
It shows us that the maximum price the firm can charge to sell any given amount of output.
4. What is total revenue? What is marginal Revenue?
Total Revenue is total inflow of receipts from selling a given amount of output. Marginal
revenue is the change in total revenue from producing one more unit of output.
5. What is the Total Revenue and Total Cost Approach?
we see the firm’s profit as the difference between TC and TR at each output level. The firm
chooses the output level where profit is greatest.
6. Fill in the Chart & graph its demand curve, TR curve & TC curve on the back.
Output Total revenue Marginal revenue
Total Cost Marginal Cost
Profit
0
0
$ 300
−$ 300
$650
$400
1
$ 650
$ 700
−$ 50
$550
$200
2
$1,200
$ 900
$ 300
$450
$100
3
$1,650
$1,000
$ 650
$350
$150
4
$2,000
$1,150
$ 850
$250
$200
5
$2,250
$1,350
$ 900
$150
$250
6
$2,400
$1,600
$ 800
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7. Facts on MR and MC:
a. When a firm faces a downward-sloping demand curve, each increase in output
causes a revenue gain, from selling additional output at the new price, and a
revenue loss, from having to lower the price on all previous units of output.
Marginal revenue is therefore less than the price of the last unit of output.
b. An increase in output will always raise profit as long as marginal revenue is
greater than marginal cost (MR > MC).
c. An increase in output will always lower profit whenever marginal revenue is
less than marginal cost (MR < MC).
d. To find the profit-maximizing output level, the firm should increase output
whenever MR > MC, but not increase output when MR < MC.
8. What is the profit-maximizing output from question 6? Answer 5.