Name: Thuy Anh Nguyen
1. Conditions for profit maximization are:
a) Difference between total revenue (TR) and total cost (TC) is maximized;
b) Marginal revenue (MR) should be equal to marginal cost (MC)
Explanations: If we assume that the company is facing a downward – sloping curve and it produces just one single product
a) Profit = TR – TC. Profit will increase if TR increases and TC decreases. If company wants profit maximization, it should be TR maximization and TC minimization. The maximized difference between TR maximization and TC minimization is profit maximization.
b) MR = MC
- This comes from the function: Marginal profit = marginal revenue (MR) - marginal cost (MC). When MR is more than MC, marginal profit is positive, when MR is down to the extent that it is smaller than MC, marginal profit is negative. When marginal profit is too positive (that’s meant the price is too high, or too negative (that’s meant the price is very low, thus the quality is thought to be bad), it gets a maximum where MR = 0.
- If we illustrate in a figure , this only happens at the point where MR cuts MC. The total profit area is the same as the maximized difference between TR maximization and TC minimization as mentioned in the first condition.
2. The difference between “risk” and “uncertainty”
Risk: Based on past experiences, we predict and know the outcomes. That’s why we also see values and objective probabilities of each outcome in the future.
Uncertainty: it shows probabilities of outcomes that we cannot know based on our experiences, and we cannot see objective probabilities of outcomes in the future.
3. Expected value:
It is the outcome that can be predicted when in a series of pay – offs, estimated objective probabilities or subjective likelihood of outcomes in the future are taken into account. Expected value for project A is made by multiplying the expected profit and the likelihood.