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If marginal revenue is 10 and marginal costs is 8 the firm should increase its output.?
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What should a monopoly do if marginal revenue exceeds marginal cost?
increase output
A manager urgues that output should be expanded so long as average revenue exceeds average cost Does this make sense to you?
This strategy is incorrect because they should decide the optimal quantity on the marginal revenue and marginal costs rather than the average revenue and average costs. It may not hold that the average revenue being higher than the average cost would lead to profits for the firm. To decide if they should produce an additional product, the firm should consider the additional cost involved with the production of this extra cost and the additional revenue incurred from the sale of this product. If this marginal revenue exceeds the marginal cost, then the firm should produce that additional unit. This decision is to be taken at all levels of output, and the firm should produce until the point where MR=MC.
Why is the equality of marginal revenue to marginal cost essential to profit maximuzation in all of the market structures?
When Marginal Cost is below Marginal Revenue, profit is increasing. When Marginal Cost is above Marginal Revenue, profit is decreasing. Since the goal of firms is to maximise profit, they should produce at a level where the MR of producing another unit is equal to the Marginal Cost of producing another unit. Firms should keep producing until this point because there is a hidden profit in MC. This is because we are not taking into account the Accounting profit.
When should a perfectly competitive firm should expand output?
when price>marginal cost
8. The marginal output rule states that if a firm does not shut down then it should produce output at a level where?
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What should a monopoly do if marginal revenue exceeds marginal cost?
increase output
When an organization can get optimal production?
this is obtained when a firm equates its marginal revenue to its marginal cost.At a level of output where MR exceeds MC,then the firm should increase output since the addition to revenue is greater than the addition to revenue.Where a firm's MR is less than its MC,the firm should lower its output since the addition to costs is greater than the addition to revenue.
When a firm's marginal revenues are higher than its marginal cost?
Marginal cost is
If marginal revenue is greater than marginal cost the firm should?
If MR is greater than MC, the firm should increase their production. The ideal amount of production is determined by allowing the marginal cost to equal the marginal revenue.
A manager urgues that output should be expanded so long as average revenue exceeds average cost Does this make sense to you?
This strategy is incorrect because they should decide the optimal quantity on the marginal revenue and marginal costs rather than the average revenue and average costs. It may not hold that the average revenue being higher than the average cost would lead to profits for the firm. To decide if they should produce an additional product, the firm should consider the additional cost involved with the production of this extra cost and the additional revenue incurred from the sale of this product. If this marginal revenue exceeds the marginal cost, then the firm should produce that additional unit. This decision is to be taken at all levels of output, and the firm should produce until the point where MR=MC.
Equilibrium of firm under Perfect competition using MR and MC approach?
Equilibrium of Firm: MR - MC ApproachProfit maximization is one of the important assumptions of economics. It is assumed that the entrepreneur always tries to maximize profit. Hence the firm or entrepreneur is said to be in equilibrium if the profit is maximized. According to Tibor Sitovosky "A market or an economy or any other group of persons and firms is in equilibrium when none of its member's fells impelled to change his behavior". Naturally, the firm will not try to change its position when it is in equilibrium by maximizing profit.There are two approaches to explain the equilibrium of the firm regards to profit maximization. They are - total revenue-total cost approach and marginal revenue-marginal cost approach. Here we concentrate only on MR - MC approach.The equilibrium of firm on the basis of MR - MC approach has been presented in the table belowAccording to MT -MC approach, when marginal revenue equals marginal cost the firm is in equilibrium and gets maximum profit. Hence, a rational producer determines the quality of output where marginal revenue equals marginal cost.The difference between total revenue and total cost is highest 210, at four units of output. At this output, both marginal revenue and marginal cost are equal, 80. Hence profit is maximized. The firm is in equilibrium. It should be noted that the table relates to imperfect competition, when price is reduced to sell more.The following two conditions are necessary for a firm to be in equilibrium.(a) The marginal revenue should be equal to marginal cost.(b) The marginal cost curve should cut marginal revenue curve from below.The equilibrium of a under to MR - MC approach has been presented in figure:-The figure depicts the equilibrium of a firm under perfect competition. The same is applicable to the firms under imperfect competition. The only difference is that the AR & MR curves under imperfect competition are different and they are downward sloping.In the figure 'OP' is the given price. Since, under perfect competition, average revenue equals marginal revenue, the AR and MR curves are horizontal from P. The profit-maximizing output is OM. Here, marginal revenue and marginal cost are equal. It is because MC and MR curves intersect each other at point E. The firm earns profit equal to PEBC.The first condition necessary for firm's equilibrium is that marginal cost should be equal to marginal revenue. But this is not a sufficient condition. It is because the firm may not be in equilibrium even if this condition is fulfilled. In the figure, this condition is fulfilled at point F. but the firm is not in equilibrium. The profit is maximized only at output OM which is higher than output ON.The second condition necessary for equilibrium is that the marginal cost curve must cut marginal revenue curve from below. This implies that marginal cost should be rising at the point of intersection with MR curve. Hence, both the conditions have been fulfilled at point E. In the figure, MC curve cuts MR curve from at point F from above. Hence, this point cannot be the point of stable equilibrium. It is because before that point marginal cost exceeds marginal revenue. It shows that it is not reasonable to increase output. After point F, the MR curve lies above MC curve. This shows that it is reasonable to increase output.
Why is the equality of marginal revenue to marginal cost essential to profit maximuzation in all of the market structures?
When Marginal Cost is below Marginal Revenue, profit is increasing. When Marginal Cost is above Marginal Revenue, profit is decreasing. Since the goal of firms is to maximise profit, they should produce at a level where the MR of producing another unit is equal to the Marginal Cost of producing another unit. Firms should keep producing until this point because there is a hidden profit in MC. This is because we are not taking into account the Accounting profit.
When should a perfectly competitive firm should expand output?
when price>marginal cost
8. The marginal output rule states that if a firm does not shut down then it should produce output at a level where?
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Profit maximization theory?
the fact that total profit reaches its maximum point where marginal revenue equals marginal cost.Contents[show] 1 Basic definitions2 Total revenue - total cost perspective3 Marginal revenue-marginal cost perspective4 Case in which maximizing revenue is equivalent5 Changes in total costs and profit maximization6 Markup pricing7 Marginal product of labor, marginal revenue product of labor, and profit maximization8 See also9 Notes10 References11 External linksBasic definitionsAny costs incurred by a firm may be classed into two groups: fixed costs and variable costs. Fixed costs, which occur only in the short run, are incurred by the business at any level of output, including zero output. These may include equipment maintenance, rent, wages of employees whose numbers cannot be increased or decreased in the short run, and general upkeep. Variable costs change with the level of output, increasing as more product is generated. Materials consumed during production often have the largest impact on this category, which also includes the wages of employees who can be hired and laid off in the span of time (long run or short run) under consideration. Fixed cost and variable cost, combined, equal total cost. Revenue is the amount of money that a company receives from its normal business activities, usually from the sale of goods and services (as opposed to monies from security sales such as equity shares or debt issuances).Marginal cost and revenue, depending on whether the calculus approach is taken or not, are defined as either the change in cost or revenue as each additional unit is produced, or the derivative of cost or revenue with respect to the quantity of output. For instance, taking the first definition, if it costs a firm 400 USD to produce 5 units and 480 USD to produce 6, the marginal cost of the sixth unit is 80 dollars.Total revenue - total cost perspectiveProfit Maximization - The Totals Approach To obtain the profit maximising output quantity, we start by recognizing that profit is equal to total revenue (TR) minus total cost (TC). Given a table of costs and revenues at each quantity, we can either compute equations or plot the data directly on a graph. The profit-maximizing output is the one at which this difference reaches its maximum. In the accompanying diagram, the linear total revenue curve represents the case in which the firm is a perfect competitor in the goods market, and thus cannot set its own selling price. The profit-maximizing output level is represented as the one at which total revenue is the height of C and total cost is the height of B; the maximal profit is measured as CB. This output level is also the one at which the total profit curve is at its maximum.If, contrary to what is assumed in the graph, the firm is not a perfect competitor in the output market, the price to sell the product at can be read off the demand curve at the firm's optimal quantity of output.Marginal revenue-marginal cost perspectiveProfit maximization using the marginal approach An alternative perspective relies on the relationship that, for each unit sold, marginal profit (Mπ) equals marginal revenue (MR) minus marginal cost (MC). Then, if marginal revenue is greater than marginal cost at some level of output, marginal profit is positive and thus a greater quantity should be produced, and if marginal revenue is less than marginal cost, marginal profit is negative and a lesser quantity should be produced. At the output level at which marginal revenue equals marginal cost, marginal profit is zero and this quantity is the one that maximizes profit.[1] Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero - or where marginal cost equals marginal revenue - and where lower or higher output levels give lower profit levels.[1] In calculus terms, the correct intersection of MC and MR will occur when:[1]The intersection of MR and MC is shown in the next diagram as point A. If the industry is perfectly competitive (as is assumed in the diagram), the firm faces a demand curve (D) that is identical to its marginal revenue curve (MR), and this is a horizontal line at a price determined by industry supply and demand. Average total costs are represented by curve ATC. Total economic profit are represented by the area of the rectangle PABC. The optimum quantity (Q) is the same as the optimum quantity in the first diagram.If the firm is operating in a non-competitive market, changes would have to be made to the diagrams. For example, the marginal revenue curve would have a negative gradient, due to the overall market demand curve. In a non-competitive environment, more complicated profit maximization solutions involve the use of game theory.Case in which maximizing revenue is equivalentIn some cases a firm's demand and cost conditions are such that marginal profits are greater than zero for all levels of production up to a certain maximum.[2] In this case marginal profit plunges to zero immediately after that maximum is reached; hence the Mπ = 0 rule implies that output should be produced at the maximum level, which also happens to be the level that maximizes revenue.[2] In other words the profit maximizing quantity and price can be determined by setting marginal revenue equal to zero, which occurs at the maximal level of output. Marginal revenue equals zero when the total revenue curve has reached its maximum value. An example would be a scheduled airline flight. The marginal costs of flying one more passenger on the flight are negligible until all the seats are filled. The airline would maximize profit by filling all the seats. The airline would determine the conditions by maximizing revenues. Changes in total costs and profit maximizationA firm maximizes profit by operating where marginal revenue equal marginal costs. A change in fixed costs has no effect on the profit maximizing output or price.[3] The firm merely treats short term fixed costs as sunk costs and continues to operate as before.[4] This can be confirmed graphically. Using the diagram illustrating the total cost-total revenue perspective, the firm maximizes profit at the point where the slopes of the total cost line and total revenue line are equal.[2] An increase in fixed cost would cause the total cost curve to shift up by the amount of the change.[2] There would be no effect on the total revenue curve or the shape of the total cost curve. Consequently, the profit maximizing point would remain the same. This point can also be illustrated using the diagram for the marginal revenue-marginal cost perspective. A change in fixed cost would have no effect on the position or shape of these curves.[2] Markup pricingIn addition to using methods to determine a firm's optimal level of output, a firm that is not perfectly competitive can equivalently set price to maximize profit (since setting price along a given demand curve involves picking a preferred point on that curve, which is equivalent to picking a preferred quantity to produce and sell). The profit maximization conditions can be expressed in a "more easily applicable" form or rule of thumb than the above perspectives use.[5] The first step is to rewrite the expression for marginal revenue as MR = ∆TR/∆Q =(P∆Q+Q∆P)/∆Q=P+Q∆P/∆Q, where P and Q refer to the midpoints between the old and new values of price and quantity respectively.[5] The marginal revenue from an "incremental unit of quantity" has two parts: first, the revenue the firm gains from selling the additional units or P∆Q. The additional units are called the marginal units.[6] Producing one extra unit and selling it at price P brings in revenue of P. Moreover, one must consider "the revenue the firm loses on the units it could have sold at the higher price"[6]-that is, if the price of all units had not been pulled down by the effort to sell more units. These units that have lost revenue are called the infra-marginal units.[6] That is, selling the extra unit results in a small drop in price which reduces the revenue for all units sold by the amount Q(∆P/∆Q). Thus MR = P + Q(∆P/∆Q) = P +P (Q/P)((∆P/∆Q) = P + P/(PED), where PED is the price elasticity of demand characterizing the demand curve of the firms' customers, which is negative. Then setting MC = MR gives MC = P + P/PED so (P - MC)/P = - 1/PED and P = MC/[1 + (1/PED)]. Thus the optimal markup rule is:(P - MC)/P = 1/ (- PED)orP = [PED/(1 + PED)]×MC.[7][8] In words, the rule is that the size of the markup is inversely related to the price elasticity of demand for the good.[7]The optimal markup rule also implies that a non-competitive firm will produce on the elastic region of its market demand curve. Marginal cost is positive. The term PED/(1+PED) would be positive so P>0 only if PED is between -1 and -∝ -that is, if demand is elastic at that level of output.[9] The intuition behind this result is that, if demand is inelastic at some value Q1 then a decrease in Q would increase P more than proportionately, thereby increasing revenue PQ; since lower Q would also lead to lower total cost, profit would go up due to the combination of increased revenue and decreased cost. Thus Q1 does not give the highest possible profit.Marginal product of labor, marginal revenue product of labor, and profit maximizationThe general rule is that firm maximizes profit by producing that quantity of output where marginal revenue equals marginal costs. The profit maximization issue can also be approached from the input side. That is, what is the profit maximizing usage of the variable input? [10] To maximize profit the firm should increase usage of the input "up to the point where the input's marginal revenue product equals its marginal costs".[11] So mathematically the profit maximizing rule is MRPL = MCL, where the subscript L refers to the commonly assumed variable input, labor. The marginal revenue product is the change in total revenue per unit change in the variable input. That is MRPL = ∆TR/∆L. MRPL is the product of marginal revenue and the marginal product of labor or MRPL = MR x MPL.
Should a monopolistically competitive firm take into account it's fixed costs when deciding how much to produce?
No. A monopolistically competitive firm should produce up to the point where marginal revenue equals marginal cost.
What is the golden rule of profit maximization?
To maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equals marginal cost; this rule holds for all market structures
