Revenue and profit functions, Mathematics

Now let's move onto the revenue & profit functions.

Demand function or the price function

Firstly, let's assume that the price which some item can be sold at if there is a demand for x units is specified by p (x ) . This function is typically called either the demand function or the price function

Revenue function

Then the revenue function is how much money is made through selling x items and is,

                                                       R ( x ) = x p ( x )

The profit function is then,

P ( x )= R ( x ) - C ( x ) = x p ( x ) - C ( x )

Be careful to not confuse the demand function, p ( x ) - lower case p, & the profit function, P ( x ) - upper case P. Bad notation possibly, but there it is.

marginal revenue function

the marginal revenue function is R′ ( x ) and

Profit function

The marginal profit function is P′ ( x)

and these revel the revenue & profit respectively if one more unit is sold.

Let's take a quick look at an example of using these.

Example  The weekly cost to generate x widgets is specified by

C ( x ) = 75, 000 + 100 x - 0.03x2 + 0.000004 x3            0 ≤ x ≤ 10000

and the demand function for the widgets is specified by,

p ( x ) = 200 - 0.005x                           0 ≤ x ≤ 10000

 Find out the marginal cost, marginal revenue & marginal profit while 2500 widgets are sold and while 7500 widgets are sold. Suppose that the company sells accurately what they produce.

Solution

The first thing we have to do is get all the several functions which we'll require. Following are the revenue & profit functions.

R ( x ) = x ( 200 - 0.005x ) =200 x - 0.005x2

P ( x ) = 200x - 0.005x2 - (75, 000 + 100x - 0.03x2+ 0.000004x3 )

= -75, 000 + 100 x + 0.025x2 - 0.000004 x3

Now, all the marginal functions are following,

C′ ( x ) = 100 - 0.06 x + 0.000012 x2

R′ ( x ) =200 - 0.01x

P′ ( x ) = 100 + 0.05x - 0.000012x2

The marginal functions while 2500 widgets are sold are following,

C′ ( 2500) = 25        R′ ( 2500) = 175                  P′ ( 2500) = 150

The marginal functions while 7500 are sold are following

C′ (7500) = 325           R′ (7500) = 125               P′ (7500) = -200

Therefore, upon producing & selling the 2501st widget it will cost the company approximately $25 to generate the widget and they will illustrates an added $175 in revenue and $150 in profit.

Alternatively while they generate and sell the 7501st widget it will cost an additional $325 and they will attain an extra $125 in revenue, however lose $200 in profit.

Posted Date: 4/13/2013 2:24:34 AM | Location : United States







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