A) 1. When determining how much of a profit a company will make, one has to look at a few deciding factors. Two of those are total revenue and total cost. Total revenue is the sum of a company’s sales of a particular product. Total cost is how much a company pays for production which includes fixed and variable costs. After total cost is deducted from the total revenue, the money left over is a profit. The goal of most is to maximize profits the best way possible. Total revenue and cost are very important when it comes to profit maximization because they are the guidelines of production. Total revenue is found by multiplying the price of the unit by the quantity produced and when compared to the total cost of each unit produced, a company can find out how many units to produce that would better maximize profits. Profit maximization is found by looking at the difference between the total revenue and total cost and determining which has the greatest profit.
2. Profit maximization can also be determined by looking at the marginal revenue to marginal cost approach. Marginal revenue is the change in total revenue resulting from the sale of an additional unit of product. Marginal cost is the cost of producing that one extra unit. To find if profits are maximized, marginal cost is subtracted from marginal revenue. Profit maximization occurs when marginal revenue exceeds marginal cost. This approach is only used if deemed profitable, if not, it is best to not produce extra.
B) Marginal revenue (MR) is determined by the change (∆) in total revenue (TR) from selling one more unit (Q) of output. So MR=∆TR/∆Q
1. When calculating marginal revenue from the given scenario, one can see that is has decreased. As production increases, total revenue does increase but marginal revenue slowly but consistently decreases by $10 a unit each time. Since this is based off of a monopolistically competitive market, fluctuation of market revenue is expected.
C) Marginal cost (MC) is determined by the change (∆) in total cost (TC) resulting from producing one more unit (Q) of output. So MC=∆TC/∆Q
1. After calculating the marginal cost, the summary is that when the quantity of production increases, total cost increases as well resulting in an increase of marginal cost. D) Profit maximization occurs for Company A at seven units of production. This was found using the total revenue to total cost method and then further evaluated using the marginal revenue to marginal cost approach. Originally, quantities seven and eight were shown to have the same outcome for TR-TC but the MR-MC approach proved that only seven units would provide a profit. The chart below explains.
E) If marginal revenue is shown to be greater than marginal cost, output should continue to increase.
F) If marginal cost is shown to be greater than marginal revenue, production output should be lowered until MR=MC or profit maximization is at its greatest; in this case 7 units of production.