Transcript MR=MC - New Paltz Middle School

Andrei Shatalov
Mr. Gill
2B 18 January 2010
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The MR=MC point is located on a graph
where the marginal revenue curve intersects
with the marginal cost curve. This point is
where firms strive to perform, because at this
point profit’s are maximized.
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MR is short for marginal revenue
Marginal Revenue is the change in total
revenue divided by the change in quantity
The Marginal Revenue curve declines at each
level of output as shown
in the graph
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MC stands for Marginal Cost
Marginal Cost is the change in total cost
divided by the change in quantity
The MC curve increases because as a firm
grows, variable costs become larger and
more prevalent
The MC curve corresponds directly with the
changes in a firm’s variable cost per unit
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The point where Marginal Revenue is equal to
Marginal costs is where firms strive to
operate at
At this point, firms are maximizing profits
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It is inefficient to operate at an output lower
than the MR=MC point, because there is still
marginal gain to be had
It is also inefficient to produce higher than
this point because total revenue will be less
than total cost
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Allocative efficiency is when a firm’s price for
a product is equal to the equilibrium price at
MR=MC.
This is considered the optimal distribution
point, because it is optimal for a profit
maximizing firm, and it is socially acceptable.
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MR=MC relates to Perfect Competition,
because a firm in a perfectly competitive
industry operates at the MR=MC point
Firms in this industry operate at this point,
because they have no control of market price,
so they have to produce at the equilibrium
quantity
If the perfectly competitive industry did not
operate at MR=MC firms would drop out due
to economic losses
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MR=MC relates to monopolies, because
monopolies produce a quantity at MR=MC
because it maximizes profits
However, monopolies’ price is higher than the
equilibrium cost because they can charge as
much as they want, because there is no
competition
A concept that implies that the firm should
consider issues such as social wants, and
profit maximization is called
1. Financial management
2. Profit maximization
3.Agency theory
4.Allocative efficiency
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A sales maximising firm will produce
where:
1. sales revenue is maximised.
2. AR minus AC is maximised.
3. MC = MR
4. Quantity sold is maximised.
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A monopolist maximizes profit at the output
level where:
1. Mp = 0.
2. P = MC.
3. MR = MC.
4. Both 1 and 3 are correct.
5. All of the above.
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1. The answer is Choice 4, because as we learned
allocative efficiency is when a firm operates at
MR=MC because it is the most efficient for the firm
economically and socially.
 2. The answer is choice 3, because a firm maximizes
profits at MR=MC, which is the same as MC=MR
 3. The answer is choice 3, because a monopolists
output is at MR=MC, but the price is at demand
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1. The diagram above shows the cost and revenue curves for a bridge
to a popular island. The marginal cost of
crossing the bridge is zero and is indicated in the diagram as the
horizontal axis. The price is the toll to cross
the bridge, and the output is the number of autos that cross the bridge
each day.
(a) Assume that a private firm owns the bridge and maximizes profits.
Based on the diagram, determine each
of the following.
(i) Output
(ii) Price
(b) Now assume that a municipality owns the bridge and sets the price
to achieve allocative efficiency.
Based on the diagram, determine each of the following.
(i) Output
(ii) Price
(c) At a price of $1, is the municipality’s accounting profit positive,
negative, or zero? Explain
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(a) 2 points:
• One point is earned for identifying the output as Q2.
• One point is earned for identifying the price as $7.
(b) 2 points:
• One point is earned for identifying the output as Q4.
• One point is earned for identifying the price as $0.
(c) 1 point:
• One point is earned for stating that the accounting profit is
positive, because the firm earns zero economic profit.
(Economic profit = Total revenue - Explicit costs - Implicit
costs.)
Profit Maximization vs. Social Maximization
http://www.opednews.com/articles/SocialBusiness-vs-Profit-by-John-Boik-110307529.html
Environment and Marginal Costs
http://www.departures.com/articles/marginalcost-of-being-green