Question

How should a company change production quantity in order to maximize total proft. If the compnay changes it's Q by 2,5 units acording to your answer calculate profit.

Answer 1

A company's profit maximising production quantity is at the level where MR(marginal revenue) = MC (marginal cost)

• MR=MC - : PROFIT MAXIMISING CONDITION
• MC must cut MR from below.

It implies the company must change production keeping in mind the Marginal Cost and Marginal Revenue.

• If the MC is less than the MR , THE COMPANY MUST INCREASE THE PRODUCTION.
• If the MC is more than MR . the company must DECREASE THE PRODUCTION.
• If the price does not cover the average variable cost then the company must shut down in short run and if the price does not cover the average costs ,then the comapny must shut down in long run.
• Profit maximising output is also decided upon by TR and TC approach . However, this approach has been not widely used and we generally follow MR-MC approach for profit maximisartion.

- Changing qty by 25 units . Say initially company produces 10 units at $20 each and has a cost of 10$ each unit.

earlier revenue= 10(20)=$200 , earlier cost =10(10) = $100 , profit = 200-100=$100

new revenue = 35(20)=$700 , new cost = 35(10)=$350 , profit = 700-350 = $350

Note - The numerical value 2,5 was not clear so I took it as 25 units. Also the question with numerical part was not clear so I have taken a hypothetical example here.