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Unformatted text preview: 1 Profit Maximization Microeconomics, Seventh Edition Boyes/Melvin Chapter 9 Chapter 9 2 Profit Maximization The objective of a for-profit firm is to maximize profit. Profit is total revenue less the costs of the resources (land, labor, capital) used. Total revenue is the price of goods and services multiplied by the quantity sold, PQ. Profit = PQ Cost of land, labor and capital 3 Marginal Revenue and Marginal Cost The Profit maximizing quantity of output can be determined by comparing marginal revenue and marginal cost. Marginal cost is the additional cost of producing one more unit of output. Marginal revenue is the additional revenue from selling one more unit of output. Profit is maximized at the output level where marginal revenue and marginal cost are equal. The supply rule is: Produce and offer for sale the quantity at which MR=MC. 2 4 MR and MC Marginal Revenue = Change in Total Revenue/Change in Total Output MR = TR/ Q Marginal Cost = Change in Total Cost/Change in Total Output MC = TC/ Q Comparing marginal revenue and marginal cost determines whether the firm needs to supply more or less in order to maximize profit....
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- Summer '08