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MR=MC

Andrei Shatalov Mr. Gill 2B 18 January 2010. MR=MC. MR=MC. The MR=MC point is located on a graph where the marginal revenue curve intersects with the marginal cost curve. This point is where firms strive to perform, because at this point profit’s are maximized. MR.

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MR=MC

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  1. Andrei Shatalov Mr. Gill 2B 18 January 2010 MR=MC

  2. MR=MC • The MR=MC point is located on a graph where the marginal revenue curve intersects with the marginal cost curve. This point is where firms strive to perform, because at this point profit’s are maximized.

  3. MR • MR is short for marginal revenue • Marginal Revenue is the change in total revenue divided by the change in quantity • The Marginal Revenue curve declines at each level of output as shown in the graph

  4. MC • MC stands for Marginal Cost • Marginal Cost is the change in total cost divided by the change in quantity • The MC curve increases because as a firm grows, variable costs become larger and more prevalent • The MC curve corresponds directly with the changes in a firm’s variable cost per unit

  5. The MR=MC point • The point where Marginal Revenue is equal to Marginal costs is where firms strive to operate at • At this point, firms are maximizing profits

  6. The MR=MC point cont. • It is inefficient to operate at an output lower than the MR=MC point, because there is still marginal gain to be had • It is also inefficient to produce higher than this point because total revenue will be less than total cost

  7. Allocative Efficiency • Allocative efficiency is when a firm’s price for a product is equal to the equilibrium price at MR=MC. • This is considered the optimal distribution point, because it is optimal for a profit maximizing firm, and it is socially acceptable.

  8. MR=MC relation to Perfect Competition • MR=MC relates to Perfect Competition, because a firm in a perfectly competitive industry operates at the MR=MC point • Firms in this industry operate at this point, because they have no control of market price, so they have to produce at the equilibrium quantity • If the perfectly competitive industry did not operate at MR=MC firms would drop out due to economic losses

  9. MR=MC relation to Monopolies • MR=MC relates to monopolies, because monopolies produce a quantity at MR=MC because it maximizes profits • However, monopolies’ price is higher than the equilibrium cost because they can charge as much as they want, because there is no competition

  10. Multiple Choice 1 • A concept that implies that the firm should consider issues such as social wants, and profit maximization is called 1. Financial management 2. Profit maximization 3.Agency theory 4.Allocative efficiency

  11. Multiple Choice 2 • A sales maximising firm will produce where: 1. sales revenue is maximised.  2. AR minus AC is maximised.   3. MC = MR   4. Quantity sold is maximised.

  12. Multiple Choice 3 • A monopolist maximizes profit at the output level where: 1. Mp = 0. 2. P = MC. 3. MR = MC. 4. Both 1 and 3 are correct. 5. All of the above.

  13. Multiple Choice Explanations • 1. The answer is Choice 4, because as we learned allocative efficiency is when a firm operates at MR=MC because it is the most efficient for the firm economically and socially. • 2. The answer is choice 3, because a firm maximizes profits at MR=MC, which is the same as MC=MR • 3. The answer is choice 3, because a monopolists output is at MR=MC, but the price is at demand

  14. Free Response Question 1. The diagram above shows the cost and revenue curves for a bridge to a popular island. The marginal cost of crossing the bridge is zero and is indicated in the diagram as the horizontal axis. The price is the toll to cross the bridge, and the output is the number of autos that cross the bridge each day. (a) Assume that a private firm owns the bridge and maximizes profits. Based on the diagram, determine each of the following. (i) Output (ii) Price (b) Now assume that a municipality owns the bridge and sets the price to achieve allocative efficiency. Based on the diagram, determine each of the following. (i) Output (ii) Price (c) At a price of $1, is the municipality’s accounting profit positive, negative, or zero? Explain

  15. Graph for Free Response

  16. Free Response Answers • (a) 2 points: • • One point is earned for identifying the output as Q2. • • One point is earned for identifying the price as $7. • (b) 2 points: • • One point is earned for identifying the output as Q4. • • One point is earned for identifying the price as $0. • (c) 1 point: • • One point is earned for stating that the accounting profit is positive, because the firm earns zero economic profit. (Economic profit = Total revenue - Explicit costs - Implicit costs.)

  17. Articles Profit Maximization vs. Social Maximization http://www.opednews.com/articles/Social-Business-vs-Profit-by-John-Boik-110307-529.html Environment and Marginal Costs http://www.departures.com/articles/marginal-cost-of-being-green

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