Profit Maximization

Profit maximization Total Revenue - Total Cost Profit = Total Cost = Fixed Cost + Variable Cost Fixed vs. Variable… examples? Fixed – rent, loan payments, capital equipment Variable – labor, raw materials Firms want TR > TC… But how do they maximize this profit? MARGINAL ANALYSIS!!!! Firms act on the margin Additional workers Layoffs Total Revenue - Total Cost

Profit maximization Marginal Cost = ∆ Cost of Inputs/ ∆ Output Do all costs change when you increase production in the short run? Revised equation: MC = ∆ Variable Cost/ ∆ Output Marginal Revenue = MC and MR are PER UNIT measurements Profit Maximization: As long as MR > MC, producers will continue to produce. Reach the point where MR = MC If Coca Cola can invest $2000 to produce 10,000 additional cans of coke that they can sell for $0.30 a can.... Should they? MC = $2000/10,000 = $0.20 per can MR = $0.30 per can Yesssss!!!!!! - $0.10 profit per can! Production Function.notebook Price each unit is sold for ?????