Question

5. Bavarian Crystal Works designs and produces lead crystal wine decanters for export to international markets. The production manager of Bavarian Crystal Works estimates total (TC) and marginal (MC) production costs to be Total Cost (TC) = $10,000 + $80Q + $0.005Q2 Marginal Cost (MC) = $80 + .01Q where costs are measured in U.S. dollars and Q is the number of wine decanters produced annually. Because Bavarian Crystal Works is only one of many crystal producers in the world market, it can sell as many of the decanters as it wishes for $100 apiece. Total Revenue or (Total Benefit (TR)) and Marginal Revenue or (Marginal Benefit (MR)) are Total Revenue (TR) = $100Q and Marginal Revenue (MR) = $100 where revenues are measured in U.S. dollars and Q is annual decanter production.

a. What is the optimal level of production of wine decanters?

b. What is the marginal revenue (benefit) from the last decanter sold?

c. What is the total revenue (benefit), total cost and net benefit (profit) from selling the optimal number of wine decanters?

d. At the optimal level of production of decanters, an extra decanter can be sold for _____, thereby increasing to revenue by ____. Why does the manager of this firm not produce and sell one more unit?

Answer 1