Question

1. Explain the model that best lends itself to the use of the MR MC approach.

2. Explain in detail the steps required to determine the optimal level of output.

3. Explain in detail the steps required to determine the product price that corresponds to that optimal level of output.

4. Explain in detail the steps required to determine if maximum profit or minimum losses have been achieved.

All questions with detail please!!

Answer 1

The utilization of the MR MC approach is best used to explain the Producer's Equilibrium Model. The producer produces goods and sells them. He incurs a cost to produce a good and earns revenue for selling the goods. The additional cost incurred to produce one additional unit of the product in the current scenario is called the Marginal cost.

Similarly the extra revenue earned by selling one additional product is known as the Marginal Revenue. Now if the marginal Revenue is equal to the marginal cost, then the producer is said to be in equilibrium.

When the marginal cost is equal to the marginal cost, it means that the producer does not make a profit or a loss by producing one additional unit. The cost that he is incurring to make the unit is exactly the revenue which he is making from selling the unit. If he makes one additional unit after this then the additional cost to produce that will be higher as compared to the revenue earned from selling it since marginal revenue goes on decreasing while marginal cost goes on increasing. So the quantity at which the marginal cost is equal to the marginal revenue is the optimal quantity.

Once the Optimal Output has been received, the producer will want to price that at the highest possible price so that the entire quantity is sold out at that price. So the consumers should have a demand of that quantity of the product. So the value of the product is identified on the demand curve of the consumers and the corresponding price is found out. This is the product price that corresponds to that optimal level of output.

The maximum profit or minimum losses will be achieved when producing an additional product does not lead to losses. So if the cost of producing an extra product is more than the revenue earned from selling it, it means that the producer has incurred some additional loss. So he will be better off not producing. Thus at this stage, his total profit will be the maximum that he can earn of this is the minimum loss that he can incur as going beyond this quantity will lead him to increase losses or reduce profits.

Mathematically, Profit = Total Revenue - Total Cost

At Profit maximization, d/dQ Profit = 0

or d/dQ (Total Revenue - Total Cost) = 0

or Marginal Revenue - Marginal Cost = 0

or Marginal Revenue = Marginal Cost.

So when the Marginal revenue is equal to Marginal cost, then the Profit is maximum.

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