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Chapter 8Slide 1 Marginal Revenue, Marginal Cost, and Profit Maximization Determining the profit maximizing level of output Profit ( ) = Total Revenue.

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Presentation on theme: "Chapter 8Slide 1 Marginal Revenue, Marginal Cost, and Profit Maximization Determining the profit maximizing level of output Profit ( ) = Total Revenue."— Presentation transcript:

1 Chapter 8Slide 1 Marginal Revenue, Marginal Cost, and Profit Maximization Determining the profit maximizing level of output Profit ( ) = Total Revenue - Total Cost Total Revenue (R) = Pq Total Cost (C) = Cq Therefore:

2 Chapter 8Slide 2 Profit Maximization in the Short Run 0 Cost, Revenue, Profit ($s per year) Output (units per year) R(q) Total Revenue Slope of R(q) = MR

3 Chapter 8Slide 3 0 Cost, Revenue, Profit $ (per year) Output (units per year) Profit Maximization in the Short Run C(q) Total Cost Slope of C(q) = MC Why is cost positive when q is zero?

4 Chapter 8Slide 4 Marginal revenue is the additional revenue from producing one more unit of output. Marginal cost is the additional cost from producing one more unit of output. Marginal Revenue, Marginal Cost, and Profit Maximization

5 Chapter 8Slide 5 Comparing R(q) and C(q) Output levels: 0- q 0 :  C(q)> R(q) Negative profit  FC + VC > R(q)  MR > MC Indicates higher profit at higher output 0 Cost, Revenue, Profit ($s per year) Output (units per year) R(q) C(q) A B q0q0 q*q* Marginal Revenue, Marginal Cost, and Profit Maximization

6 Chapter 8Slide 6 Comparing R(q) and C(q) Question: Why is profit negative when output is zero? Marginal Revenue, Marginal Cost, and Profit Maximization R(q) 0 Cost, Revenue, Profit $ (per year) Output (units per year) C(q) A B q0q0 q*q*

7 Chapter 8Slide 7 Comparing R(q) and C(q) Output levels: q 0 - q *  R(q)> C(q)  MR > MC Indicates higher profit at higher output Profit is increasing R(q) 0 Cost, Revenue, Profit $ (per year) Output (units per year) C(q) A B q0q0 q*q* Marginal Revenue, Marginal Cost, and Profit Maximization

8 Chapter 8Slide 8 Comparing R(q) and C(q) Output level: q *  R(q)= C(q)  MR = MC  Profit is maximized R(q) 0 Cost, Revenue, Profit $ (per year) Output (units per year) C(q) A B q0q0 q*q* Marginal Revenue, Marginal Cost, and Profit Maximization

9 Chapter 8Slide 9 Question Why is profit reduced when producing more or less than q*? R(q) 0 Cost, Revenue, Profit $ (per year) Output (units per year) C(q) A B q0q0 q*q* Marginal Revenue, Marginal Cost, and Profit Maximization

10 Chapter 8Slide 10 Comparing R(q) and C(q) Output levels beyond q * :  R(q)> C(q)  MC > MR  Profit is decreasing Marginal Revenue, Marginal Cost, and Profit Maximization R(q) 0 Cost, Revenue, Profit $ (per year) Output (units per year) C(q) A B q0q0 q*q*

11 Chapter 8Slide 11 Therefore, it can be said: Profits are maximized when MC = MR. Marginal Revenue, Marginal Cost, and Profit Maximization R(q) 0 Cost, Revenue, Profit $ (per year) Output (units per year) C(q) A B q0q0 q*q*

12 Chapter 8Slide 12 Marginal Revenue, Marginal Cost, and Profit Maximization

13 Chapter 8Slide 13 Marginal Revenue, Marginal Cost, and Profit Maximization

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