Profitwill be maximized when total revenue (TR) exceeds total cost (TC) bythe greatest amount (Peterson, 2014). Thus in this scenario profit islikely to be maximized at quantity 7 and 8 which have the greatestprofit margin of $540. This is also the point where the additionalrevenue of producing one more unit is equal to an additional cost ofproducing one more unit at which the additional cost is increasing.This means that profit is maximized when marginal revenue (MR) isequal to marginal cost (MC) at which point marginal cost isincreasing.
Thereare three important steps to calculate marginal cost. First,calculate the total revenue by multiplying the unit price by thequantity sold. Second, calculate a change in revenue when productionis increased by a single unit. This is done by subtracting theinitial total revenue from the new total revenue and dividing theanswer by any additional units in production sold. In this scenariomarginal revenue decreases with increase in quantity and Totalrevenue (Marshall & Guillebaud, 2013). Just like MR, Marginalcost is calculated by taking a change in total cost divided by anyadditional units in production. In this case, the marginal costdecreases with increasing quantities and total cost (Frank &Bernanke, 2013).
Profitmaximization in this case scenario occurs at quantity 8, this iswhere MR=MC, also this is where the difference between TR and TC isat the highest in addition to quantity 7. If a firm is producing at alevel where marginal revenue is greater than marginal cost, then byproducing one more unit the firm can gain more revenue than it losesin cost and thereby makes a marginal profit. This will be true up tothe point that MR = MC. If a firm produces past that point, thenmarginal revenue is less than marginal cost. This means that the firmis losing profit with each additional unit of output and it shouldproduce less (Lerner, 2013). Production of fewer units will mean thatthe firm will be able to lower its total costs hence reducing itsmarginal cost gap in relation to marginal revenue.
Frank,R., & Bernanke, B. (2013). Principlesof economics.Boston, Mass.: McGraw-Hill.
Lerner,A. (2013). Theeconomics of control.New York: The Macmillan Co.
Marshall,A., & Guillebaud, C. (2013). Principlesof economics.London: Macmillan for the Royal Economic Society.
Peterson,W. (2014). Principlesof economics: micro.Homewood, Ill.: R.D. Irwin.