4. Picking a Quality Level Suppose dwelling quality is measured on a scale of 1 to 10, and the monthly cost of producing a particular quality equals the square of the quality level: For quality level 1, the cost is $1; for quality level 2, the cost is $4, and so on. The monthly rent equals the price per unit of quality (P = $9) times the quality level. Total revenue B Total cost Quality of dwelling Marginal cost Marginal revenue Quality of dwelling Owner's objective is to maximize profit, the gap between total revenue and total cost. Profit is maximized at the quality level where the marginal benefit (the price of quality) equals the marginal cost: q*. a. Use a two-panel graph as the above figure to show the profit- maximizing quality level. b. At the profit maximizing quantity of marginal cost equals
4. Picking a Quality Level Suppose dwelling quality is measured on a scale of 1 to 10, and the monthly cost of producing a particular quality equals the square of the quality level: For quality level 1, the cost is $1; for quality level 2, the cost is $4, and so on. The monthly rent equals the price per unit of quality (P = $9) times the quality level. Total revenue B Total cost Quality of dwelling Marginal cost Marginal revenue Quality of dwelling Owner's objective is to maximize profit, the gap between total revenue and total cost. Profit is maximized at the quality level where the marginal benefit (the price of quality) equals the marginal cost: q*. a. Use a two-panel graph as the above figure to show the profit- maximizing quality level. b. At the profit maximizing quantity of marginal cost equals
Microeconomics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506893
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter7: Consumer Choice And Elasticity
Section: Chapter Questions
Problem 8CQ
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Transcribed Image Text:4. Picking a Quality Level
Suppose dwelling quality is measured on a scale of 1 to 10, and the monthly cost
of producing a particular quality equals the square of the quality level: For quality
level 1, the cost is $1; for quality level 2, the cost is $4, and so on. The monthly
rent equals the price per unit of quality (P = $9) times the quality level.
Total revenue
B
Total cost
Quality of dwelling
Marginal cost
Marginal revenue
Quality of dwelling
Owner's objective is to maximize profit, the gap between total revenue and total
cost. Profit is maximized at the quality level where the marginal benefit (the price
of quality) equals the marginal cost: q*.
a. Use a two-panel graph as the above figure to show the profit- maximizing
quality level.
b. At the profit maximizing quantity of
marginal cost equals
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