8.5 : Short-run Profit Maximization II

Determining the optimal production quantity is crucial for manufacturers and service providers alike, aiming to maximize profits in a competitive market. The intersection of Marginal Revenue (MR) and Marginal Cost (MC) curves offers a clear path to this goal. This pivotal point, known as q*, reveals the profit-maximizing quantity.

Calculating Total Revenue: At q*, total revenue is calculated by multiplying the quantity (q*) by the product's price.

Calculating Total Cost: Utilize the Average Total Cost (ATC) Curve, a U-shaped curve that signifies the cost per unit at different production levels. Total cost is found by multiplying q* by the ATC.

Profit Analysis: Profit is the difference between total revenue and total cost, calculated at q*. This is visually represented by a rectangular area on the graph. A larger area implies higher profit.

Implications of Production Decisions: Producing at an output level less than q* results in missed profits. Producing at an output level exceeding q* also results in missed profits.

The intersection of MR and MC curves is not just a theoretical concept; it is a practical guide for businesses to maximize profits. By carefully analyzing the relationship between total revenue and total cost, companies can pinpoint the most profitable production quantity.