Finance and the Economy · Seminar 4 · Cost-volume-profit analysis

Finding the profit-maximising output

The firm sells every unit at the same price, so total revenue is a straight line and marginal revenue equals price. Total cost rises faster and faster. Profit is the vertical gap between the two; it peaks where marginal revenue equals marginal cost. Question 2, from Business Economics (Mankiw, Taylor & Ashwin, ch. 10).

Pick a price, or slide it. The dashed gap at the best output is the profit; the table recomputes MR, MC and profit for every unit.
lowhigh

Profit-maximising output

Profit at that output

MR and MC there

Rule

QTRTCProfitMRMC

Reading the table. MR is the change in total revenue from one more unit; MC is the change in total cost. Keep producing while MR ≥ MC. The unit where they are equal is the last one worth making; the next one adds more to cost than to revenue.

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