Question

P = $10

Q1 = 10      Q2 = 20 Q3 = 30

MC = 5 at Q1         MC = 10 at Q2                  MC = 15 at Q3.

I want you to consider the production rule that says produce the level of output where MR = MC.

What Q will the firm produce when following the production rule?

When Q moves from 5 to 6 what is the relationship between MR and MC and thus what is happening to profit (You do not know exactly what MC is, but you have an idea from the graph)?

When Q moves from 10 to 11 what is the relationship between MR and MC and thus what is happening to profit (You do not know exactly what MC is, but you have an idea from the graph)?

Answer 1

In the given situation, the MR or the Marginal revenue gained by selling each unit is constant at it is given by the price P=10$

Now we have MR=10$

According to the profit maximising level of output given by MR=MC, we will have MR=10=MC and we can see from the data that this point of production where MC=10 happens at Q2 =20

When Q moves from 5 to 6 (Note that we are still below Q1)

The MR is a constant of 10$, the MC will increase as it is increasing with increasing Q, however since the MC is still less than 10$ (MC is less than 10 until Q2 = 20 where it becomes equal to 10)

Since the MR is higher than the MC, the profit will increase as the money gained from that unit will be higher than what it cost to produce it.

Even as Q goes from 10 to 11, it is still Q2=20 and therefore the MC will also be less than 10. Even at this point, the profits will keep increasing as the Marginal revenue of 10 is still higher than the MC which is less than 10.