Please comment answer you dont always have to

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Unformatted text preview: es and, to tell you the truth, I don’t think any one of them even knew what marginal revenue and marginal cost are. You can’t expect me to believe that these business owners were producing the quantity of output for which MR MC if they didn’t even know what MR and MC are. Please comment. ANSWER: You don’t always have to understand how to do something in order to do it. For example, not many people understand how their legs move to make them walk, or how their lungs behave to make them breathe, but still they walk and breathe. Our guess is that a bird doesn’t really understand aerodynamics (which is the study of forces and the resulting motion of 178 Chapter 7 Business Operations objects through the air), but still birds can fly. A business owner may not know what marginal revenue and marginal cost are, but here is what a business owner does know: whether more money is “coming in” than is “going out.” And, of course, this is what marginal revenue and marginal cost really are. The additional money coming in is marginal revenue and the additional money going out is marginal cost. As long as a business owner can count, he or she will naturally end up producing the level of output at which MR MC. Having said all this, let us add that sometimes taking a course in economics or in business formalizes all these “business practices” more effectively. For example, a person who has studied economics would be less likely to make a mistake when determining what quantity of a good to produce than a person who has not studied economics. What Every Firm Wants: To Maximize Profit In Chapter 3 we stated that profit is the difference between total revenue and total cost. For example, if total revenue is $400,000 and total cost is $320,000, then profit is $80,000. The firm wants profit to be as large as possible. An economist states it this way: The business firm wants to maximize profit. 07 (154-185) EMC Chap 07 11/17/05 5:14 PM Page 179 Of course if the firm wants to maximize profit, this is just another way of saying that it wants the biggest difference possible between its total revenue and its total cost. For example, given a choice of a total revenue of $1 million or $2 million, a business firm would prefer a total revenue of $2 million (all other things being equal). Or given a choice of a total cost of $250,000 or $500,000, a business firm would prefer a total cost of $250,000 (all other things being equal). So, maximizing profit is consistent with a firm getting the largest possible difference between its total revenue and its total cost. Now here is something to think about: Is getting the largest possible difference between total revenue and total cost the same thing as producing the quantity of output at which MR = MC? The answer is that “getting the largest possible difference between total revenue and total cost” is the same thing as producing the quantity of output at which MR MC. To prove it, again suppose that a business firm’s total reven...
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This document was uploaded on 01/16/2014.

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