The AAA Aquarium Co. sells aquariums for 20 each. Fixed costs of production are 20 . The total

step 1 Once again, welcome to a new problem. This time we're dealing with specific costs. And remember

The AAA Aquarium Co. sells aquariums for 20 each. Fixed...

Key Concepts

Total Revenue

This concept refers to the total income a firm receives from selling its product. It is calculated by multiplying the selling price per unit by the number of units sold. Total revenue is a crucial component in determining a firm's overall profitability and is often plotted as a curve to visually compare with the total cost curve.

Marginal Revenue

Marginal revenue is the additional revenue generated by selling one more unit of a product. It is derived by taking the change in total revenue when increasing output by one unit. This measure helps firms understand how revenue scales with additional production and is essential in decision-making about increasing or reducing output.

Total Cost

Total cost represents the sum of all costs incurred in producing a given level of output. It combines fixed costs, which do not vary with the level of production, and variable costs, which change according to the quantity produced. Understanding total cost is key to analyzing the overall efficiency and profitability of production.

Marginal Cost

Marginal cost is the increase in total cost that arises from producing one additional unit of output. It is calculated as the difference in total cost between two successive output levels. This concept is critical for production decisions because it helps identify the output level at which producing additional units is either profitable or leads to diminishing returns.

Profit Maximization

Profit maximization is the decision rule provided by economic theory which states that a firm should produce up to the point where marginal revenue equals marginal cost, provided that doing so does not result in losses. At this output level, the firm maximizes its profit, since producing an additional unit would add more cost than revenue. This concept integrates the analysis of revenue and cost curves to ensure optimal output selection.

Transcript

00:01 Once again, welcome to a new problem.

00:04 This time we're dealing with specific costs.

00:09 And remember that you could have fixed costs in a business.

00:16 You could have fixed costs, like, for example, rent.

00:21 You could also have variable costs.

00:24 You could have variable costs, like, say, wages.

00:33 Fixed costs, we can symbolize that as fc.

00:36 And variable costs vc, for example.

00:41 And then, of course, total costs, tc, becomes the sum of fixed costs and variable costs.

00:53 Fix costs, they don't change month to month, but then variable costs do change based on the number of products being sold.

01:03 So you could have products costing a certain amount and being sold.

01:10 So on the other hand, we do also have things like revenue.

01:18 So we have revenue.

01:20 So total revenue, tr, is when you take a specific number of items, which you call q, these are items, and you multiply that by the unit price.

01:40 And that gives you the total revenue, revenue being the amount of.

01:45 Of money that you get from sales.

01:49 We also have marginal cost, which is simply the change in total cost of the change in number of units.

02:00 So this is change in total cost versus change in number of units.

02:13 Number of units produced, for example.

02:15 When we think about marginal cost, all we're saying is the extra cost that businesses have to deal with in producing an extra unit.

02:44 In producing an extra unit.

02:46 So that's the extra cost that we do have.

02:50 Profit is obviously going to be the difference between total revenue and total cost.

02:59 That's the total profit.

03:01 T standing for total.

03:04 We could also have marginal profit to optimize your profits.

03:14 Your marginal cost has to equal to your marginal revenue.

03:17 Remember, marginal revenue is changing total revenue over changing the quantity and then marginal cost is the changing, total cost over the changing, the quantity is being sold.

03:31 So in this particular problem, we have two questions.

03:36 The first one is find the profit maximizing quantity.

03:51 Find the profit maximizing quantity.

03:54 And then the other one is visualize.

04:02 Visualize the total revenue together with the total cost on the same graph and also visualize the marginal revenue and the marginal revenue and the marginal cost and the marginal cost graphs.

04:47 So the first thing we're going to do in this particular problem is to address the graphical issues.

04:55 Those are the things we're looking at.

04:58 So the first graph that we discuss is the total revenue and total cost graph.

05:07 This is total revenue, just remember that.

05:10 Tr is total revenue and tc is total cost rough.

05:17 And that's based off of the the data provided.

05:24 So we're provided with a quantity of units that were producing.

05:33 And so we have to bring in specific data that reflects the quantity of units.

05:42 For example, one unit is a variable cost of 20 and a fixed cost of 20.

05:50 And then the total cost is 40.

05:55 And besides that, we have the total revenue, which is 20, and then the marginal revenue is also 20.

06:08 So remember, we do have formulas for this.

06:11 This is changing total revenue over changing quantity, and this is changing total cost over changing quantity.

06:21 And then we have fixed cost, total cost and variable costs.

06:24 So taking these two together, we get the total cost.

06:31 That's why you have, for example, for quantity, we want to say for quantity one, for example, you get to see that the variable cost is 20, fixed cost is 20, total cost is variable cost plus fixed cost, which is 40.

07:05 Total revenue is how much money you get.

07:12 We actually do need after the total cost we need a marginal cost column so let's change this a little bit just a little bit it's changing this a little bit and we're going to be back on track so this is variable cost and then fixed cost and then total cost and then of course we have marginal cost so fixed cost is 20 so if you add them, you get it, and then total cost is 40.

08:06 We're not going to have any marginal costs because there's no change in total cost.

08:15 Remember, if we do marginal cost, that's changing total cost over change in quantity.

08:24 So at the beginning, you don't really have any change in total cost because you start with a specific quantity.

08:35 So we have zero.

08:36 Total revenue is 20 and marginal revenue is 20.

08:46 Selling two items, fixed cost stays the same, so it's always going to be 20.

08:53 Fixed cost stays at 20.

09:07 So total cost will be 45 because you're summing up these two.

09:12 Marginal cost is the change in total cost and you can see if you want to change the total cost in that sense, change in total cost would be 45 minus 40.

09:28 45 is when you're selling two units and 40 is when you're selling one unit.

09:36 So the change in total cost is 5 and then divide by the change in quantity.

09:42 You only change by one unit.

09:45 So 2 minus 1, which is 1.

09:47 So this is 5 and 1.

09:49 This is 5.

09:49 That's why we have marginal cost is 5.

09:51 When it comes to total revenue, we're doubling, and the reason why we're doubling is because that's going to be the selling price.

10:10 The selling price for the item, which is the revenue you get from selling one unit, total revenue for one unit is $20.

10:27 If you want to think of it in terms of dollars, so here we're selling two...

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