Explain profit maximization from the following approaches:
Total revenue to total cost –
In order to project what profits a company will generate, we will use two factors, total cost and total revenue. The total revenue is determined by multiplying the product of sales (quantity) by the given price. TR=P*Q
The total cost is what a company pays for production of a product which includes both total fixed cost (TFC) and total variable cost (TVC). Whereas TC= TFC + TVC (Q) at each level a unit is produced. Once the total cost is deducted from the total revenue earned, the amount left over is profit. The business goal is to maximize profits by using the most efficient processes.
Marginal revenue to marginal cost - For firms to find the maximum profit point, they view the marginal revenue (MR) – which is the total gain in revenue from selling an ...view middle of the document...
This the formula is used to determine the marginal revenue. ΔTR/ ΔQ
Now I will show how marginal revenue increases, decreases, or remains constant in the given scenario. MR decreases as the quantity increase. Applying the ΔTR/ ΔQ equation shows that as more units are produced the firm earns $10.00 on each additional unit of output. For example, a company producing widgets has a total revenue of $0, when it doesn't produce any output.
The revenue it sees from producing its first widget is $150, bringing marginal revenue to $150 ($150 in total revenue/1 unit of product). If the revenue from the second widget is $290, the marginal revenue gained by producing the second widget is $10 (change in total revenue: $290-$150/1 = $140 from $150 = $10 for each additional unit).
Now I will explain the calculation used to determine marginal cost. Marginal cost is (MC) = ΔTC /ΔQ or Where Δ= Change, TC= Total Cost, Q= Quantity
Discuss how marginal cost increases, decreases, or remains constant in the given scenario. MC appears to decrease then stabilize after the first widget is sold. The price decreases from the first unit of output from $20.00 and becomes stable with each addition output unit.
Explain where profit-maximization occurs for Company A using the chart provided in the given scenario. In this scenario, profit maximization occurs when 8 widgets of output are produced for Company A. the MC=MR requirement for this to be true is met. The company realizes profit maximization at the point when the total revenue of $920.00, a total cost of $380.00, where the (MR) marginal revenue and (MC) marginal cost will intersect at $80.00.
Explain what action should be taken in terms of adjusting output if it is determined that marginal revenue is greater than marginal cost.
If MR > MC, Company A should continue to produce additional unit of product.