Question

1. What does the word “marginal” mean?

2. What does the phrase “marginal analysis” mean?

3. What does marginal revenue mean?

4. What does marginal cost mean?

5. What does marginal profit mean? How are marginal revenue and marginal cost related to marginal profit?

6. Recall that profit is like a hill; it goes up and then it goes down. Our goal as a firm is to choose the value of Q that gets us to the top of the hill.

1. A firm tells you that the marginal revenue for the 200^th unit of output = 12 and the marginal cost for that unit = 8. What does that mean?
2. Is profit rising or falling or not changing?
3. What advice should you give this firm? (Produce more; produce less; don’t change your production number because it is just right). Explain your advice.
4. How did marginal analysis help you to give this firm advice? Answer the question “Is it worth it?” in your answer.

Please cover all questions--thank you

Answer 1

1. The term marginal means change in the existing units of production or change in the cost or revenue. In any business firm, if there is an additional increase in the units of production then it comes under the term marginal .Suppose a firm produce 10 units and then started producing 11th unit then that one additional unit is called marginal and the change in cost due to additional unit of production is marginal cost and change in revenue due to additional sale of goods is marginal revenue.

2.Marginal analysis is the cost-benefit analysis in any business firm whether it is a manufacturing firm or any other sector. Whenever any firm wants to go for expanding the business or want to increase the number of units produced then it will go for marginal analysis. In this method,it tries to find out whether the additional cost incurred will be profitable or not and it will lead to revenue collection or not.

3.Marginal revenue is the change in the revenue with the sale of an additional unit of product.It is seen in perfectly competitive market that a firm continues to produce until its marginal cost equals marginal revenue.Suppose a firm earn 50 dollar from selling 10 units and it costs 6 dollar for 51 unit then the marginal revenue for 51th unit is 6 dollar.

4. Marginal cost is the change in the cost by producing an additional unit of a product .It includes all cost which varies with the level of production. Thus if a firm incur a cost of 5odollar in producing a tiffin box and 55 dollar in producing 2 tiffins then marginal cost in expanding the business of tiffin by one additional unit is 5dollar.

5. Marginal profit is the profit earned when one additional unit of any product is produced or sold.It is basically the difference between marginal cost and marginal revenue. Whenever a firm wants to go for expansion or contraction then it wants to test whether it is profitable or not. Any firm goes on increasing its production until its marginal cost equals marginal revenue.

Marginal cost,marginal revenue and marginal profit are related to each other. Marginal profit is the difference between marginal revenue and marginal cost.

Marginal Profit = Marginal Revenue - Marginal cost

If a firm wants to go for expansion then it will continue to produce till its marginal revenue is greater than marginal cost. It means the firm is having marginal profit. At a point when both marginal cost equals marginal revenue , the firm stops producing additional units.

6.The purpose of any business firm is to maximize profit. It goes on producing output until the revenue it receives is more than the cost incurred.The meaning of the sentence that profit is like a hill means that profit is never stable.Due to various factors like cost of production,competition ,a firm may not be able to achieve profit sometimes and sometimes it experienced tremendous profit. So to choose quantity Q means that to produce that level of quantity Q at which the cost will be minimised so that the revenue will be maximum. To explain this in marginal terms,it means if a firm wants to expand then it will produce additional unit only when the marginal revenue or the additional revenue from the sale of additional unit is more. So Q will be the point where marginal revenue equals marginal cost.

If the marginal revenue for 200th unit is 12 and marginal cost is 8 then it means that marginal profit is 12-8 which is equal to 4. It means a firm is in a position to go on producing 200th unit as marginal revenue which is 12 is greater than marginal cost of 200th unit which is 8.

Here the marginal profit is 4. So the profit is rising as the revenue earned from additional 200th unit is 12 which is more than marginal cost.

As far as my opinion is concerned ,the firm can still go on producing additional units because here marginal revenue is more than marginal cost.so it will be profitable as the cost incurred in producing additional unit is less than the revenue .Thus it Is profitable to expand until the margins revenue equals marginal cost. After this point , the company will face loss of it continues to produce additional units.

While using marginal analysis, it is possible to know the cost-benefit analysis of producing additional units. If the cost incurred is less than the benefit then the firm can go on expansion. If there will he reverse case then the company will face loss as the cost will increase which leads to less revenue . Thus it will not be profitable. Thus it is worth to use marginal analysis whenever a firm goes on expansion or contraction in order to estimate cost and benefit analysis.