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A. Explain profit maximization from the following approaches: 1. Total revenue to total cost 2. Marginal revenue to marginal cost Profit maximization is when the largest amount of profit is made based on output levels and prices. In the total revenue to total cost approach, profit is maximized when the total revenue exceeds total cost by the greatest amount. The profit maximization is going to be found between the two break even points. The break even points are where the total revenue and total cost are equal to each other, but that only includes the normal profit. Economic profit is found between the break even points and that is also where the greatest distance between total revenue and total cost is found. In the marginal revenue to marginal cost approach, profit is maximized when the two equal each other. This approach shows profit will be made as long as marginal revenue is more than marginal cost, and the profit is maximized once marginal revenue equals marginal cost. When marginal cost exceeds marginal revenue, profit is no longer being made. Profit maximization will only occur if the price of the product is equal to or greater than the average variable cost. If the marginal revenue does not exceed or at least equal the average variable cost, it would make the most sense to shut down production completely. B. Explain the calculation used to determine marginal revenue. 1. Discuss how marginal revenue increases, decreases, or remains constant in the given scenario. Marginal revenue is the change in the amount of total revenue as a result from the sale of an additional unit of product. To calculate marginal revenue you most take the amount of change of total revenue and then divide it be the amount of change in the quantity of product being sold. So you are finding out how much the revenue changes each time an additional item to the quantity. To do this, you…...

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...cost you will have a profit but when total cost exceeds total revenue you have a loss. In the graph below you can see at 8 units is where the maximum profit would be. After 8 units are produce you see the effect of diminishing returns as your profit for each unit produced gets smaller and smaller until it hits 15 units and you are now taking a loss for each unit produced. Profit maximization is determined by the greatest gap between TR & TC. Quantity TR TC Profit 0 \$0.00 \$10.00 (\$10.00) 1 \$150.00 \$30.00 \$120.00 2 \$290.00 \$50.00 \$240.00 3 \$420.00 \$80.00 \$340.00 4 \$540.00 \$120.00 \$420.00 5 \$650.00 \$170.00 \$480.00 6 \$750.00 \$230.00 \$520.00 7 \$840.00 \$300.00 \$540.00 8 \$920.00 \$380.00 \$540.00 9 \$990.00 \$470.00 \$520.00 10 \$1,050.00 \$570.00 \$480.00 11 \$1,100.00 \$680.00 \$420.00 12 \$1,140.00 \$800.00 \$340.00 13 \$1,170.00 \$930.00 \$240.00 14 \$1,190.00 \$1,070.00 \$120.00 15 \$1,200.00 \$1,220.00 (\$20.00) Quantity MR MC 0 \$0.00 \$0.00 1 \$150.00 \$20.00 2 \$140.00 \$20.00 3 \$130.00 \$30.00 4 \$120.00 \$40.00 5 \$110.00 \$50.00 6 \$100.00 \$60.00 7 \$90.00 \$70.00 8 \$80.00 \$80.00 9 \$70.00 \$90.00 10 \$60.00 \$100.00 11 \$50.00 \$110.00 12 \$40.00 \$120.00 13 \$30.00 \$130.00 14 \$20.00 \$140.00 15 \$10.00 \$150.00 When using the marginal cost to marginal revenue to determine maximum profit you would use the formula MR=MC. So when the marginal revenue is equal to marginal cost your profit is at its......

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