A. Two methods of profit maximization that companies utilize are the total revenue to total cost approach and the marginal revenue to marginal cost approach. To attain their goal of achieving the highest level of profit, Company A uses these methods to determine the appropriate output level to achieve their goal. Both methods arrive at the same level.
In the first approach, Company A first determines its total revenue by multiplying the number of widgets sold by the price of the widget. Next it determines its total cost which comprises of the sum of all costs including fixed and variable costs. Company A’s profit is then calculated by total revenue minus total cost. However, in an effort to maximize their profit, Company A would look to produce it’s widgets at the output level where the margin between total revenue and total cost is the largest resulting in the greatest profit.
In the second approach, Company A first determines its marginal revenue which is the total change in revenue resulting from selling one additional widget. Next it determines its marginal cost which is the total change in cost for producing that additional widget. In an effort to maximize their profit, Company A would look to produce it’s widgets at the output level that is closest to the point where marginal revenue is equal to marginal cost.
B. The formula for Marginal Revenue (MR) is the Change ( ) in Total Revenue (TR) divided by the Change in Quantity (Q); where Total Revenue is equal to Price (P) times Quantity (Q).
MR = TR / Q
Where TR = P x Q
Marginal revenue is calculated by the change in total revenue resulting from selling one additional widget. For example, in the chart below, the total revenue for the first widget is $150 and the total revenue for the second widget is $290. The marginal revenue for 2 widgets is $140 ($290 - $150).
In the given...
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