Profit Maximizing Output Formula

Following the example above we can generalize the relationship between marginal revenue and price of a monopolist as follows.

Profit maximizing output formula. So if the price elasticity of demand is 2 the profit maximizing price is. Neoclassical econo mics currently the mainstream approach to microeconomics usually models the firm as maximizing profit. 114 the profit-maximising output is q.

Substituting 2000 for q in the demand equation enables you to determine price. Set marginal revenue equal to marginal cost and solve for q. For our example above the marginal cost of selling two cars would be 30650 minus 15400 which equals 15250.

Profit Maximization - Profit Maximizing Output Formula In economics profit maximization is the short run or long run process by which a firm may determine the price input and output levels that lead to the greatest profit. Therefore at this output q the TR TC gap TR TC is maximum. Determine marginal cost by taking the derivative of total cost with respect to quantity.

In addition profit maximization helps in determining the behaviour of business organisations and effect of various economic factors such as price and output in different market conditions. Profit Total Revenue Total Costs. Thus the profit-maximizing quantity is 2000 units and the price is 40 per unit.

At this output the slope of the TR curve has been equal to that of the TC curve as the tangents at the points E and F have been parallel. Given a table of costs and revenues at each quantity we can either compute equations or plot the data directly on a graph. Marginal profit for selling 80 pens is now 100.

Selling 120 pens results in a total profit of 650 and the marginal profit is negative 25. One way to find the profit-maximizing quantity would be to take the derivative of the profit formula with respect to quantity and setting the resulting expression equal to zero and then solving for quantity. Since marginal cost of 15250 is less than marginal revenue of 20000 the car dealership should increase sales to optimize profit until marginal cost equals marginal revenue.