A1) Profit maximization is a the process a company takes to measure difference between cost and profit in order to determine the most successful profit ratio for the company. (profit maximization, Wikipedia, 2014)
Total Revenue is the total dollar amount that is made from all items a company sells. “Total cost is a combination of all variable and fixed cost expenses at various levels of production”. (Profit maximization, Wikipedia, 2014) To maximize the profits of a company the total revenue must be more than the total cost. (Wikipedia, 2014) Companies must find a way to have a combination of the lowest total cost with the highest total revenue.
A2) The other way to look at profit maximization is to compare Marginal Revenue and Marginal cost. These two depend on the amount of goods sold. “Marginal revenue is additional revenue that is generated by increasing sales by 1 unit. Marginal cost is the additional cost of producing 1 more unit.” (Wikipedia, 2014).
The way to determine if this is will be successful for the company or not is taking marginal cost and subtract from marginal revenue. This will determine the marginal profit. If the marginal profit is a positive number that means that the cost and revenue ratio are earning money for the company. If it is a negative number then it cost more to product the additional unit than you are making on the unit. Therefore, it is not in the company’s best interest to product that additional unit.
In order to achieve profit maximization from Marginal Revenue a company needs to make sure their total revenue is up. Total revenue is the sum of a company’s sales of a specific quantity of product. The maximum profit will fall on what the total revenue is after the company pays it’s product and operating costs. In order to find the largest profit maximization a company must find the point where marginal cost is equal to marginal revenue. So when the cost of producing an extra unit is equal to the amount of revenue it brings in. This is the high point of the first profit. If the marginal revenue is more than marginal cost a company can keep adding a unit to keep raising the revenue or until it becomes equal to marginal cost.
Marginal Revenue is the revenue that a company makes on outputting 1 additional unit. (Marginal revenue, Wikipedia, 2014) To determine marginal revenue you need to divide the change in total revenue by the change in output quantity.
In the given scenario (see chart below) the first increase is when 1 unit is produced. The marginal revenue is 150. The revenue decreases when it gets to 2 units. The revenue becomes 140. Then 130 for 3 units and 120 for 4 units. This is the pattern for the given scenario. It continues to decrease by 10 until the end of the chart where the marginal revenue ends up at 10 with 15 units.
Marginal Cost is the change in total cost of producing one more unit. This is calculated by dividing the total cost by the change in output.
For the given scenario (chart shown below) when there is 1 unit, the marginal cost is 20, when you get to 2 units, the marginal costs stays the same. Then at 3 units the…