Competency 309.1.1 Marginal Analysis – The Graduate Correctly Applies

Marginal Analysis
Quantity TR TC MR MC
0 0 10
1 150 30 150 20
2 290 50 140 20
3 420 80 130 30
4 540 120 120 40
5 650 170 110 50
6 750 230 100 60
7 840 300 90 70
8 920 380 80 80
9 990 470 90 90
10 1050 570 100 100
11 1100 680 110 110
12 1140 800 120 120
13 1170 930 130 130
14 1190 1070 140 140
15 1200 1220 150 150
Part A
The total revenue to total cost approach can be used in determining
profit maximizing quantity. When using total revenue and total cost,
profit is determined as: profit = Total Revenue less Total Cost (Tucker,
2008). Therefore, the profit maximizing quantity is established where
this difference reaches its maximum. Through plotting total revenue and
total cost on a graph, this output can be determined. The following is a
graph showing a plot for total revenue and total cost. The profit is
maximized, where the output is equal to 8, where the two curves reach
their maximum.
On the other hand, when using the marginal revenue marginal cost
approach, the profit maximizing output is established where marginal
revenue equates marginal cost (Boyes & Melvin, 2012). From the above
table, marginal revenue equates the marginal cost from the production of
8 units. The profit does not increase after producing 8 units hence, 8
units is the profit maximizing output.
Part B
Marginal revenue is calculated by finding the derivative of the total
revenue (Taylor, 2008). That is, by dividing a change in total revenue
by a change in quantity of output. In the given scenario, the marginal
revenue decreases by 10 units for the production of one unit up to the
production of eight units. The marginal revenue then increases by 10
units from the production of 9 units.
Part C
The marginal cost is calculated by dividing a change in total cost by a
change in quantity of output (Boyes & Melvin, 2012). In the given
scenario, the marginal cost remains constant for the production of the
first two units. However, the marginal cost increases by 10 units for
every additional unit after the second unit.
Part D
Using the information provided for company A, profit maximization occurs
at an output level of 8 units. This is the profit maximizing output
because at this output level, the marginal revenue equates the marginal
cost. At this output level, marginal revenue is 80 units while the
marginal cost is also 80 units. Besides, at this output level, the total
revenue and total cost curves reach their maximum. In addition, the
profit function reaches maximum at 8 units.
Part E
When the marginal revenue is greater than the marginal cost, the level
of output needs to be increased up to a level, where the marginal
revenue will equate the marginal cost. Increasing the output to such a
level will help an enterprise in maximizing its profit.
Part F
When it is noted that the marginal cost is greater than the marginal
revenue in the production of a certain commodity, it implies that the
production level is not favorable for profit maximization. In response
to this problem, the output level needs to be decreased up to the level,
where the marginal revenue will equate the marginal cost. This will be
beneficial to an entity since it will be capable of maximizing its
profit.
References
Boyes, W. J., & Melvin, M. (2012). Fundamentals of economics. Mason,
Ohio: South-Western/Cengage Learning.
Taylor, J. B. (2008). Economics. Boston, Mass: Houghton Mifflin.
Tucker, I. B. (2008). Survey of economics. Mason, OH: South-Western
Cengage Learning.
COMPETENCY 309.1.1: MARGINAL ANALYSIS PAGE * MERGEFORMAT 4
COMPETENCY 309.1.1: MARGINAL ANALYSIS

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