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Profit Maximization

Module. Micro: Econ:. 17. 53. Profit Maximization. KRUGMAN'S MICROECONOMICS for AP*. Margaret Ray and David Anderson. What you will learn in this Module :. The principle of marginal analysis. How to determine the profit-maximizing level of output using the optimal output rule.

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Profit Maximization

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  1. Module Micro: Econ: 17 53 Profit Maximization • KRUGMAN'S • MICROECONOMICS for AP* Margaret Ray and David Anderson

  2. What you will learnin thisModule: • The principle of marginal analysis. • How to determine the profit-maximizing level of output using the optimal output rule.

  3. Profit Maximization • Both TR and TC are functions of output. As more output is sold (at a constant price), TR and TC both rise. The goal of the firm is to find the level of output where the economic profit is greatest (maximized).

  4. Marginal Analysis • Marginal revenue is the additional revenue from selling one more unit of output. MR = ΔTR/∆Q • Marginal cost is the additional cost incurred from producing one more unit of output. MC = ΔTC/∆Q • Firms will continue to produce as long as MR > MC and will stop producing when MC = MR

  5. The Optimal Output Rule MC = MR

  6. Graphical Representation of Profit Maximization

  7. When is Production Profitable? So long as economic profit is greater than or equal to zero, the firm should continue to operate. If economic profits dip below zero (i.e. below a normal profit), the firm would consider permanently closing and moving resources to their next best alternative.

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