The following questions explore the relationships between total and marginal functions in the economic profit-maximizing (EPM) model:Required:A. The total revenue function rises over the range of operating activity portrayed in the text. Why does the marginal revenue function decrease?B. What is the behavior of the marginal cost curve?C. In the EPM model, where is the profit-maximizing volume level? Explain.
What will be an ideal response?
A. The total revenue function is increasing at a decreasing rate; consequently, the rate of change in marginal revenue is negative.
B. The marginal cost curve decreases initially, reflecting economies of scale achieved at relatively low levels of activity. However, at relatively high levels of activity, the marginal cost curve increases because of diseconomies of scale (law of diminishing returns).
C. The profit-maximizing volume level is at the intersection of the marginal cost and marginal revenue curves.
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