Economics – profit maximizing output
International Business School
Hanze University of Applied Sciences, The Netherlands
Learning Objective
Using marginal analysis to calculate a firm’s profit-maximizing
output level from given data.
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Profit maximizing output
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Marginal analysis and decision making
The firm can use marginal analysis to determine the profitmaximizing output.
Marginal analysis:
•marginal cost indicates additional cost of producing one more unit.
•marginal revenue indicates additional revenue of one more unit sold.
=> as long as revenue exceeds cost additional profit is made
=> profit is maximized by producing the output at which
marginal revenue(MR) equals marginal cost (MC).
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Profit maximizing output
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Scenario
The following data is available for a firm in perfect competition:
sales price per unit
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Profit maximizing output
fixed cost
cost for one unit of labour
4
Output schedule
No. of workers
Output (per
month)
increase per
additional worker
1
15
-
2
40
25
3
70
30
4
110
40
5
130
20
6
140
10
7
145
5
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Profit maximizing output
law of diminishing
returns
5
Law of diminishing returns
• Assumption: fixed assets (machinery and tools cannot be
increased in the short run), therefore production capacity is limited.
• The idea:
– if you hire more workers they can specialize in a process;
– if you hire too many workers they will be in each other’s way.
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Profit maximizing output
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Determining marginal cost
No. of
workers
Output (per
month)
fixed cost (FC)
1
15
$ 30,000
2
40
$ 30,000
3
70
$ 30,000
4
110
$ 30,000
5
130
$ 30,000
6
140
$ 30,000
7
145
$ 30,000
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Profit maximizing output
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Determining marginal cost
No. of
workers
Output (per
month)
fixed cost
(FC)
variable cost
(VC)
1
15
$ 30,000
$2,000
2
40
$ 30,000
$4,000
3
70
$ 30,000
$6,000
4
110
$ 30,000
$8,000
5
130
$ 30,000
$10,000
6
140
$ 30,000
$12,000
7
145
$ 30,000
$14,000
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Profit maximizing output
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Determining marginal cost
No. of
workers
Output (per
month)
fixed cost
(FC)
variable cost
(VC)
total cost
(TC)
1
15
$ 30,000
$2,000
$32,000
2
40
$ 30,000
$4,000
$34,000
3
70
$ 30,000
$6,000
$36,000
4
110
$ 30,000
$8,000
$38,000
5
130
$ 30,000
$10,000
$40,000
6
140
$ 30,000
$12,000
$42,000
7
145
$ 30,000
$14,000
$44,000
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Profit maximizing output
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Determining marginal cost
No. of
workers
Output (per
month)
fixed cost
(FC)
variable cost
(VC)
total cost
(TC)
average cost
(AC)
1
15
$ 30,000
$2,000
$32,000
$2,133
2
40
$ 30,000
$4,000
$34,000
$850
3
70
$ 30,000
$6,000
$36,000
$514
4
110
$ 30,000
$8,000
$38,000
$345
5
130
$ 30,000
$10,000
$40,000
$307
6
140
$ 30,000
$12,000
$42,000
$300
7
145
$ 30,000
$14,000
$44,000
$303
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Profit maximizing output
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Determining marginal cost
No. of Output (per
workers
month)
fixed cost
(FC)
variable cost
(VC)
total cost
(TC)
Δ𝑇𝑇𝑇𝑇
Δ𝑄𝑄
average cost marginal cost
(AC)
(MC)
1
15
$ 30,000
$2,000
$32,000
$2,133
2
40
$ 30,000
$4,000
$34,000
$850
3
70
$ 30,000
$6,000
$36,000
$514
4
110
$ 30,000
$8,000
$38,000
$345
5
130
$ 30,000
$10,000
$40,000
$307
6
140
$ 30,000
$12,000
$42,000
$300
7
145
$ 30,000
$14,000
$44,000
$303
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Profit maximizing output
2000
= 80
25
2000
= 67
30
2000
= 50
40
2000
= 100
20
2000
= 200
10
2000
= 400
5
11
Determining marginal revenue
output
total revenue
(TR)
15
$5,250
40
$14,000
70
$24,500
110
$38,500
130
$45,500
140
$49,000
145
$50,750
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Profit maximizing output
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Determining marginal revenue
output
total revenue
(TR)
average
revenue
15
$5,250
$350
40
$14,000
$350
70
$24,500
$350
110
$38,500
$350
130
$45,500
$350
140
$49,000
$350
145
$50,750
$350
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Profit maximizing output
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Determining marginal revenue
output
output
total
totalrevenue
revenue
(TR) (TR)
average
average
revenue
revenue
15
$5,250
$350
40
$14,000
$350
70
$24,500
$350
110
$38,500
$350
130
$45,500
$350
140
$49,000
$350
145
$50,750
$350
In perfect competition:
P = AR = MR
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Profit maximizing output
marginal
revenue (MR)
8750
= 350
25
14000
= 350
40
3500
= 350
10
10500
= 350
30
7000
= 350
20
1750
= 350
5
14
Marginal analysis
output
marginal
revenue (MR)
marginal
cost (MC)
40
350
80
70
350
67
110
350
50
130
350
100
140
350
200
145
350
400
15
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Profit maximizing output
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Marginal analysis
output
marginal
revenue (MR)
marginal
cost (MC)
40
350
80
70
350
67
110
350
50
130
350
100
140
350
200
145
350
400
15
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Profit maximizing output
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Marginal analysis
output
marginal
revenue (MR)
marginal
cost (MC)
40
350
80
70
350
67
110
350
50
130
350
100
140
350
200
145
350
400
15
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Profit maximizing output
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Double check
output
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total revenue (TR) total cost (TC)
profit (TR – TC)
15
$5,250
$32,000
- 26,750
40
$14,000
$34,000
-20,000
70
$24,500
$36,000
-11,500
110
$38,500
$38,000
500
130
$45,500
$40,000
5,500
140
$49,000
$42,000
7,000
145
$50,750
$44,000
6,750
Profit maximizing output
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To be continued
You will learn the “diagram for a firm in pc” in the
coming part.
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