When equations of total revenue and total cost is given then what is the level of output at which the profit gets maximised?
Answers
Explanation:
Total profit equals total revenue minus total cost. In order to maximize total profit, you must maximize the difference between total revenue and total cost. The first thing to do is determine the profit-maximizing quantity. Substituting this quantity into the demand equation enables you to determine the good’s price. Alternatively, dividing total revenue by quantity enables you to determine price.
Graphically, the total revenue and total cost curves appear shown in the illustration. The total revenue curve increases but at a decreasing rate — the curve becomes flatter. Eventually, total revenue begins to decrease.
This relationship between total revenue and quantity reflects the fact that as a monopolist, you need to charge a lower price in order to sell more output. The lower price leads to smaller increases and eventually decreases in total revenue.
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Answer:
For producer's equilibrium MR should be equal to MC and MC should cut MR from below, i.e, the slope of MC must be positive at the point of intersection. Such a point indicates the level of output where the firms earns maximum possible profits. On the other hand, if the MC cuts the MR from above, i.e. MC is negatively sloped, then this indicates that profits can be further increased by increasing the level of production. Hence, it would not be the point of profit maximisation.