EGT Task 1

Topics: Economics, Profit maximization, Marginal cost Pages: 2 (547 words) Published: March 19, 2014
Marginal Analysis in a Monopolistically Competitive Market Structure EGT1 Task 1

Company A is a producer of widgets in a monopolistically competitive market structure. It is projected that as more widgets are sold, Company A must offer a discount on each one to ensure adequate demand. Due to limited supplies and the cost of equipment maintenance the cost will rise as more widgets are produced. Revenue and cost at different output levels for the year:

Task A. Profit Maximization
Profit maximization is a process used to determine which combination of product price and output level will yield the greatest profit. There are two approaches commonly used in profit maximization. Total Revenue to Total Cost

This first approach takes our total revenue, or all of the sales of our widgets, and subtracts the total cost and focuses on maximizing the difference. The total revenue or TR may be calculated by multiplying the price by the quantity sold. The total cost includes all of the fixed costs plus the variable costs. This covers the cost of all factors in the production of the widgets. Marginal Revenue to Marginal Cost

This alternate approach to profit maximization involves subtracting the marginal cost or MC from the marginal revenue or MR. The goal here is to find the intersection of MR and MC. The maximum total profit would be where MR = MC. Marginal revenue is the increase in revenue from one additional unit of output. This is calculated by dividing the change in the total revenue by the change in the quantity, which is typically 1. Previously I had mentioned that the total revenue can be found by multiplying the price and quantity. Task B. Calculating Marginal Revenue

Marginal revenue is calculated by dividing the change in total revenue by the change in quantity. MR = ΔTR ÷ Δq where Δq is typically 1. Marginal Revenue analysis of Company A
As charted on the first page, with each additional widget that company A produces the MR...
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