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How to calculate Marginal Benefit, Marginal Revenue, and Marginal cost, if the profit per unit, price per unit, quantity, costs per unit, and % return on sales are given? Explain with a quantitative example in dollar units, instead of percentages
How to calculate Marginal Benefit, Marginal Revenue, and Marginal cost, if the profit per unit, price per unit, quantity, costs per unit, and % return on sales are given? Explain with a quantitative example in dollar units, instead of percentages.
Expert Solution
Assume we are given the following table:
| Quantity | Profit/Unit | Cost/Unit | Price/Unit |
|---|---|---|---|
| 0 | 0 | 0 | 0 |
| 1 | 5 | 1 | 6 |
| 2 | 4 | 2 | 6 |
| 3 | 3 | 3 | 6 |
| 4 | 2 | 4 | 6 |
| 5 | 1 | 5 | 6 |
| 6 | 0 | 6 | 6 |
| 7 | -1 | 7 | 6 |
To get marginal benefit, cost, and revenue first we need to find profit, total cost, and revenue at each output level. Profit is simply profit/unit multiplied by quantity. Total cost is cost/unit multiplied by quantity. Revenue is price/unit multiplied by quantity. We thus get the following table
| Quantity | Profit/Unit | Cost/Unit | Price/Unit | Profit | Total Cost | Revenue |
|---|---|---|---|---|---|---|
| 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| 1 | 5 | 1 | 6 | 5 | 1 | 6 |
| 2 | 4 | 2 | 6 | 8 | 4 | 12 |
| 3 | 3 | 3 | 6 | 9 | 9 | 18 |
| 4 | 2 | 4 | 6 | 8 | 16 | 24 |
| 5 | 1 | 5 | 6 | 5 | 25 | 30 |
| 6 | 0 | 6 | 6 | 0 | 36 | 36 |
| 7 | -1 | 7 | 6 | -7 | 49 | 42 |
We then need to just take the changes in profit, total cost, and revenue from one output level to the next to get marginal benefit, marginal cost, and marginal revenue respectively. This gives us
| Quantity | Profit/Unit | Cost/Unit | Price/Unit | Profit | Total Cost | Revenue | Marginal Benefit | Marginal Cost | Marginal Revenue |
|---|---|---|---|---|---|---|---|---|---|
| 0 | 0 | 0 | 0 | 0 | 0 | 0 | - | - | - |
| 1 | 5 | 1 | 6 | 5 | 1 | 6 | 5 | 1 | 6 |
| 2 | 4 | 2 | 6 | 8 | 4 | 12 | 3 | 3 | 6 |
| 3 | 3 | 3 | 6 | 9 | 9 | 18 | 1 | 5 | 6 |
| 4 | 2 | 4 | 6 | 8 | 16 | 24 | -1 | 7 | 6 |
| 5 | 1 | 5 | 6 | 5 | 25 | 30 | -3 | 9 | 6 |
| 6 | 0 | 6 | 6 | 0 | 36 | 36 | -5 | 11 | 6 |
| 7 | -1 | 7 | 6 | -7 | 49 | 42 | -7 | 13 | 6 |
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