Question

Walter’s Wiggles produces and sells bobbleheads. The selling price of each collectible bobblehead is $80, and the variable cost per bobblehead is $48. Fixed costs are $4,000. Using this data, answer the following questions:

What is the break-even point in units and dollars?

Answer 1

To calculate the total revenue, multiply the selling price per unit by the number of units sold. The profit-maximizing quantity of output is the level where marginal revenue equals marginal cost, which in this case is three units.

Step-by-step explanation:

To calculate the total revenue, multiply the selling price per unit by the number of units sold:

1. For one unit: $20 x 1 = $20
2. For two units: $20 x 2 = $40
3. For three units: $20 x 3 = $60
4. For four units: $20 x 4 = $80
5. For five units: $20 x 5 = $100

To calculate the marginal revenue, subtract the total revenue of the previous output level from the total revenue of the current output level:

1. For two units: $40 - $20 = $20
2. For three units: $60 - $40 = $20
3. For four units: $80 - $60 = $20
4. For five units: $100 - $80 = $20

To calculate the total cost, add the fixed costs to the variable costs:

1. For one unit: $20 + $20 = $40
2. For two units: $20 + $25 = $45
3. For three units: $20 + $35 = $55
4. For four units: $20 + $50 = $70
5. For five units: $20 + $80 = $100

To calculate the marginal cost, subtract the total cost of the previous output level from the total cost of the current output level:

1. For two units: $45 - $40 = $5
2. For three units: $55 - $45 = $10
3. For four units: $70 - $55 = $15
4. For five units: $100 - $70 = $30

The profit-maximizing quantity of output is the level where marginal revenue equals marginal cost. In this case, the profit-maximizing quantity is three units.

On the total revenue and total cost curves diagram, plot the quantity on the x-axis and the total revenue and total cost on the y-axis. The total revenue curve will start at zero and increase linearly with quantity, while the total cost curve will start at the fixed costs and increase more rapidly with quantity.

On the marginal revenue and marginal cost curves diagram, plot the quantity on the x-axis and the marginal revenue and marginal cost on the y-axis. The marginal revenue curve will be horizontal and equal to the selling price, while the marginal cost curve will increase with quantity.