What would your answer be the correct answer is four

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Unformatted text preview: ecide how many T-shirts to produce? This is one question that every business firm has to answer: MR MC $10 $10 $10 $10 $10 $4 $6 $8 $9.99 $11 Having looked at the data, someone asks you: What is the right number of T-shirts for you to produce? What would your answer be? The correct answer is four T-shirts. In other words, you should keep producing T-shirts as long as marginal revenue (additional revenue of producing the additional T-shirt) is greater than the marginal cost (additional cost of producing the additional T-shirt). As long as what comes in through the “revenue door” is greater than what leaves through the “cost door,” you ought to keep producing T-shirts. Look at it this way: How much should we produce? Suppose you decide to produce 1,000 T-shirts a month. Now someone comes up to you and asks: What price will you charge for each T-shirt? What are you going to say? Are you going to say $10, or $10.50, or $15? How will you decide how much to charge for each T-shirt? Here then is a second question every firm has to answer: What price should we charge? In this section we will talk more about these two questions. How Much Will a Firm Produce? Suppose again that you produce T-shirts. You have to decide how many to produce. What two pieces of information do you need before you can decide how many T- MR > MC → Produce MC > MR → Do not produce Now if you want to produce as long as MR > MC, and you don’t want to produce if MC > MR, then ask yourself when you should stop producing. For example, you’ve already produced, say, 10,000 hats. Should you go ahead and produce one more? The answer is yes as long as marginal revenue is greater than marginal cost—even if the difference between marginal cost and marginal revenue is one penny (as was the case for the fourth T-shirt in the example). Now suppose the difference is even less than one penny. Suppose it is half a penny. Should you still produce the good? Again the answer is yes. What about one-fourth of a penny? Yes, produce it. You can perhaps see where we are leading. Economists essentially say that it is beneficial to produce as long as marginal revenue is greater than Section 3 Revenue and Its Applications 177 07 (154-185) EMC Chap 07 All companies want to maximize profits and generate the kinds of results you see in the newspaper reports. How do automobile manufacturers know how many cars to produce and what does that have to do with maximizing profits? 11/17/05 5:14 PM Page 178 marginal cost, even if the difference between the two is extremely small. For all practical purposes, then, economists are saying that a business firm should continue to produce additional units of its good until the marginal revenue (MR) is equal to the marginal cost (MC). In the T-shirt example, we didn’t find any unit of T-shirt at which MR MC, but we did find one where there was only a penny difference. We stopped producing after we had produced the fourth T-shirt because it was as close to MR MC as we could get. QUESTION: I have known some people who owned business...
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This document was uploaded on 01/16/2014.

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