PROFIT, COST, AND REVENUE #1

IB Economics HL 2.11 Profit Maximization

1. Shakespeare’s is a small, family owned artisan coffee manufacturer in Poland. The table below
shows possible weekly output of coffee (in kg) as well as its selling price and the total cost of
production.

Output Price Marginal Total Cost Marginal Total Profit

Cost Revenue Revenue
0 300,00 zł
200 10,00 zł 1 300,00 zł
400 9,50 zł 2 100,00 zł
600 8,00 zł 2 800,00 zł
800 7,00 zł 3 350,00 zł
1000 6,00 zł 3 750,00 zł
1200 4,00 zł 4 250,00 zł
1400 2,00 zł 4 950,00 zł
1600 1,00 zł 5 950,00 zł

a) Fill in the table with correct values of Marginal Cost, Marginal Revenue, Total Revenue, and Profit. [4]

b) Explain what value of output will maximize the profits for the company [2]

c) Calculate the average cost for profit-maximizing output. [2]

d) Calculate average revenue for profit-maximizing output. [2]

e) Sketch fully labelled total cost and total revenue curves [2]

f) Sketch fully labelled Shakespear’s Marginal Cost and Marginal Revenue curves [2]

IB Economics Marcin Sztomberski 1

 PROFIT, COST, AND REVENUE #2
IB Economics HL 2.11 Profit Maximization

2. ‘Crazy Hats’ is a small privately owned party hat producer who has capacity to produce between
60 and 80 hats per week. Portion of their cost and revenue can be seen in a table below

Total Average Average Total

Output Price
Cost Cost Revenue Revenue
60 £ 50 £ 1 500 £ 3 000
65 £ 40 £ 1 750 £ 2 600
70 £ 35 £ 2 000 £ 2 450
75 £ 30 £ 2 250 £ 2 250
80 £ 25 £ 2 500 £ 2 000

A) Calculate Average Cost and Average Profit [4]

B) Explain at which level of output the company will make normal profit. [2]
C) Define Profit maximization. [2]
D) Using data explain how much should ‘Crazy Hats’ produce if it would like to follow profit
maximization principle. [2]
E) Sketch ‘Crazy Hats’ average cost curve [2]

IB Economics Marcin Sztomberski 2

 PROFIT, COST, AND REVENUE #3
IB Economics HL 2.4 Business Objectives and 2.11 Profit Maximization

1. Not-So-Funny Cups Ltd. is one of the leaders in production of cups in the USA. It has yearly sales
revenue of $6 million from selling their $0.6 million of cups for $10 each at a total cost of $5.7
million. The total value of the market is estimated at $20 million.

a) Define market share [2]

b) Calculate Not-So-Funny Cups Ltd. Market Share [2]
c) Calculate how many more cups the company needs to sell a year (at the same price) if it wants to
increase its market share to 35%. [2]
d) Calculate Not-So-Funny Cups Ltd. Average Cost [2]
e) Explain why Not-So-Funny Cups Ltd. may be more interesting in increasing their market share
instead of maximizing the profit. [2]

IB Economics Marcin Sztomberski 3

 PROFIT, COST, AND REVENUE #4
IB Economics HL 2.4 Business Objectives and 2.11 Profit Maximization

1. ‘Krystal Clear’ is a mineral water producer in India. It has just increased the production from
450 000 to 500 000 bottles of mineral water a month and its current Marginal Cost is 4 ₹ per bottle.
‘Krystal Clear’ bottles are sold at stable price of 5₹. However, the company was recently strongly
criticized that its increased production is making harm to the local people and the environment
and the shareholders are afraid that it may reduce the sales.

a) Explain whether ‘Krystal Clear’ should increase or decrease production in order to maximize
profits. [2]
b) Calculate ‘Krystal Clear’s’ total revenue [2]
c) Calculate ‘Krystal Clear’s’ current profit [2]
d) List two ways in which ‘Krystal Clear’ could adopt growth as its business objective [2]
e) Explain how adopting Corporate Social Responsibility objectives could help ‘Krystal Clear’ to
reduce the criticism and improve its brand image. [2]

IB Economics Marcin Sztomberski 4

 PROFIT, COST, AND REVENUE #5
IB Economics HL 2.4 Business Objectives and 2.11 Profit Maximization

1. Click-clack Inc. is a producer of fidget spinners who produces them at average costs of €4 per piece.
The company used to sell 30 000 spinners per month for a price of €5 per piece but last week the
prices have dropped to €3.5 per piece due to reduced demand in the summer. Sales forecasts say
that next month the demand will increase again which will bring the price to €4 per piece.

a) Define the term ‘abnormal profit’ [2]

b) Explain at which price(s) Click-clack Inc. was making

i. Abnormal profit [2]

ii. Normal profit [2]

iii. Loss [2]

c) Calculate current total monthly profit/loss. [2]

IB Economics Marcin Sztomberski 5