AD wants to determine optimum number of students fro each EOC561 class. You are provided with the following data;
Tution is$1,250 per student
Instructor pay is $2,500
Other incidental costs $1,000
Variable cost increases by 10% per each additional student
How many students will you recommend to the AD?
28 students
What would be the profit for the given number of students?
$19,390
Is this profit maximizing?
The profit is not maximizing since at this point the marginal cost is not equal to the marginal revenue.
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Assume variable cost increases by 15% per additional student; how many students will you recommend for the AD?
Increasing variable cost by 15% per student causes an infinite value for recommended students for the AD. As a result, increasing variable cost has an effect that cannot be quantified based on the calculations.
What would be the profit for the given number of students?
Due to the infinite nature of the result, profits cannot be quantified.
Is this profit maximizing?
Due to the situation above, profits cannot be determined and therefore it is not possible to determine whether there is maximization or not.
What is the relevance of the marginal rule in both decisions making?
According to the marginal decision rule, an activity should be expanded if its marginal benefit exceeds its marginal cost. At the time when the variable cost increased by 10% per additional student with the recommended number of students standing at 28, the marginal revenue still exceeded the marginal and beyond 28 students, the marginal cost would exceed the marginal revenue hence the decision to recommend 28 students when the variable cost increases by 10%.
