MC=MR Profit Maximization Approach

Formulas for your use:

*Cost Side Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC) Average Fixed Cost (AFC) = FC/Q Average Variable Cost (AVC) = VC/Q Average Total Cost (ATC) or Average Cost (AC) = AFC+AVC or AC/Q (Note: it is suggested that you use the second formula for class uniformity) Marginal Cost (MC) = Present TC minus Previous TC/ Present Q minus Previous Q (or the Difference in Total Costs divided by Difference in Quantities) * Revenue Side Total Revenue (TR) = P Q (or Price multiplied to Quantity) Average Revenue (AR) = TRQ (TR divided by Q) = Price (P) Marginal Revenue (MR) = Present TR minus Previous TR/Present Q minus Previous Q (or Difference in Total Revenues divided by the Difference in Quantities Note: Once you have the MC and the MR per level you can now evaluate if the producer attained profit maximization based on the three (3) expected outcomes: MC > MR; MC < MR or MC = MR Fast Fact: There are two (2) approaches for profit maximization: TR-TC Approach and MC=MR Approach

Assigned Activity: Matrix Construction and Computation

Construct a matrix given the data and answer the questions which follow: Three (3) levels of production Level 1 has a volume of production of 10,000; Fixed Cost of 5,000; Total Cost of 15,000; and a Price of 2.25 Level 2 has a quantity of 25,000; Variable Cost of 17,000; and a Price of 1.50 Level 3 has Production Volume of 50,000; Total Cost of 50,000; and a Price of 5.00 You are to assume that our seller is trying to maximize his profits (and he knows that the profit maximization formula is MC=MR), evaluate if he was able to maximize his profits at Productions Levels I, II, and III. Why or why not?