Final answer:
To calculate total revenue, multiply the selling price of each unit by the quantity sold. Marginal revenue is the change in total revenue when one additional unit is sold. Total cost is the sum of fixed costs and variable costs. The profit-maximizing quantity of output is when marginal revenue equals marginal cost.
Step-by-step explanation:
To calculate total revenue, we need to multiply the selling price of each unit by the quantity sold. For example, when selling one unit, the total revenue is $20. When selling two units, the total revenue is $40, and so on. Marginal revenue is the change in total revenue when one additional unit is sold. For example, when selling two units, the marginal revenue is $20, as the total revenue increased from $20 to $40.
Total cost is the sum of fixed costs and variable costs. For example, when producing one unit, the total cost is $40 ($20 fixed costs + $20 variable costs). When producing two units, the total cost is $45 ($20 fixed costs + $25 variable costs), and so on. Marginal cost is the change in total cost when one additional unit is produced. For example, when producing two units, the marginal cost is $5, as the total cost increased from $40 to $45.
The profit-maximizing quantity of output is the quantity at which marginal revenue equals marginal cost. In this case, it occurs when producing four units. When plotting the total revenue and total cost curves, the total revenue curve increases linearly, while the total cost curve increases at an increasing rate. The marginal revenue and marginal cost curves both increase, but the marginal cost curve increases at a faster rate.