Question

Fill in the blanks in the table below                                      (20marks)

OUTPUT	PRICE	TOTAL COST	total fixed cost	TOTAL VARIABLE COST	TOTAL REVENUE	MARGINAL REVENUE	MARGINAL COST	PROFIT
0	5	5
1	5	10
2	5	13
3	5	14
4	5	16
5	5	19
6	5	23
7	5	28
8	5	34

1. Explain the difference between economists and accountants

definitions of profit. What assumption is required such that the

profit levels you calculated in the table above represent economic

profit?                                                 (5marks)

b. What is the profit maximising level of output? What can you

say about the relationship between marginal cost and marginal

revenue at this point?                         (5marks)

Answer 1

Fixed Cost remains fixed irrespective of the amount of output. It is there even when the output is 0.

Total Cost = Fixed Cost + Variable Cost

Total Revenue = Price * Output

Marginal Revenue = TRn - TRn-1

Marginal Cost = TCn - TCn-1

Output	Price	Total Cost	Total Fixed Cost	Total Variable Cost	Total Revenue	Marginal Cost	Marginal Revenue
0	5	5	5	5-5 = 0	5*0 = 0	-	-
1	5	10	5	10 - 5 = 5	5*1 = 5	10-5 = 5	5-0 = 5
2	5	13	5	13 - 5 = 8	5*2 = 10	13-10 = 3	10 - 5 = 5
3	5	14	5	14 - 5 = 9	5*3 = 15	14-13 = 1	15-10 = 5
4	5	16	5	16-5 = 11	5*4 = 20	16-14 = 2	20-15 = 5
5	5	19	5	19-5 = 14	5*5 = 25	19-16 = 3	25-20 = 5
6	5	23	5	23-5 = 18	5*6 = 30	23-19 = 4	30-25 = 5
7	5	28	5	28 - 5 = 23	5*7 = 35	28-23 = 5	35-30 = 5
8	5	34	5	34 - 5 29	5*8 = 40	34-28 = 6	40-35 = 5

a) Accountant profit is reflected in the financial records of the company. The difference between the Total Revenue and Total Cost as per the financial records is the accounting profit. Economic profit also takes into consideration the cost components whcih are hidden like a businessman using his own plot of land for building the office, an entrepreneur's salary if he works outside rather than using his skills in the firm.

b) Profit Maximizing level of output is where the marginal revenue equals the marginal cost. In this case, the profit maximizing level of output is 7 units, where MR = MC (5).