In order to maximize its profits, a firm must understand both its
costs and revenue. "Clearly, the amount of output supplied must
depend upon the costs of production. Take the supply of bicycles as
an example. No sane firm would supply bicycles at a dollar a dozen,
for that price would not even cover the cost of the seats. On the
other hand, if bicycles were selling at $10 million apiece, everyone
would rush in to open up new bicycle firms. Under normal
circumstances, a firm's output decision is not so obvious and will
involve the marginal cost of producing output," (pages 141-142).
As long as the firm is able to sell its products for a price that is
higher than the marginal cost of the last unit, it can always make
additional profit. "Total profit reaches its peak -- is maximized --
when there is no longer any extra profit to be earned by selling extra
output. At the maximum profit point, the last unit produced brings in
an amount of revenue exactly equal to that unit's cost," (page 142).
Therefore, "a profit-maximizing firm will set its production at that
level where marginal cost equals price," (page 143).
I will upload a file called Economics Question 14 with a graph and an
accompanying chart once you provide me with a username and password
that will access your FTP site. I have been unable to access it using
the username and password you provided above.
Sincerely,
Wonko
Reference: Economics, 14th edition, Samuelson & Nordhaus, McGraw-Hill Inc., 1992 |
