## Step Two – Revenue
and Profit

Next we examine the
revenue and profit for the company. In particular, we will see
how selling price influences profit. Use the cost function from
Step One.

## Comprehension

1)
The revenue from selling a barrel of oil also depends on
several factors. What do you think some of these factors are?

2)
What is *profit*? What information do you need to
determine the profit?

3)
How does the selling price affect profit?

## Acquisition

Some of the terms we
introduced in this section (revenue, profit, marginal revenue,
marginal profit) may be unfamiliar to you. To see precise definitions
and examples, click here or see the menu topic.

## Application

### We first assume that a particular selling
price has been set.

### Assumptions

Selling price is $15
per barrel.

The cost function derived
in Step One is valid.

### Questions

1)
Write the expression which defines the revenue function.

2)
What is the marginal revenue?

3)
Write the expression which defines the profit function.

4)
What is the smallest number of barrels that should be sold
for the operation to be profitable? What is the largest number?

5)
How many barrels should be sold to give maximum profit?
What is the maximum profit.

6)
Verify that maximum profit occurs when marginal revenue
= marginal cost.

## Reflection

1)
Suppose that the selling price for a barrel of oil increases
to $20 per barrel.

a)
Write the new revenue function and profit function.

b)
What is the smallest number of barrels that should be sold
for the operation to be profitable? What is the largest number?

c)
How many barrels should be sold to give maximum profit?
What is the maximum profit.

d)
Verify that maximum profit occurs when marginal revenue
= marginal cost.

2)
Repeat question 1) with the assumption that the selling
price for a barrel of oil decreases to $14.50.

3)
Compare the three profit functions. What conclusions can
you draw?

4)
Would it make sense for the producer to continue to raise
the price of oil? Why?