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Competency 309.1.1: Marginal Analysis

A.1. Profit maximization is the desire and target of all trading companies that operate in various industries, in different markets (Taylor & Weerapana, 2012). They must first of all produce products for sale to achieve the same. This production results into various financial costs that have to be overcome with the revenue from the sales. The difference between the total revenue and total costs becomes the profit to the firm. The total revenue to total cost approach is, therefore, concerned with maximizing the difference between total revenue and total cost.

2. Marginal revenues to marginal cost approach are meant to supplement the total revue to total cost approach (Taylor, 2008; Landsburg, 2011). In this perspective, marginal profit is arrived at after subtracting marginal cost from the marginal revenue of a firm. In the event that the marginal revenue is higher than the marginal cost at a given level of output, it follows that additional quantities should be produced.

B. 1. Marginal revenue is known to be the revenue that accrues to the firm after having produced one extra unit on top of what had been produced initially. It is got from dividing the total revenue obtained by the firm from trading activities with the number of units sold. Marginal revenue increases when the production of additional units generates more revenue while it reduces when the production of additional units tend to result into the realization of relatively low revenue. It follows the notion of having a revenue increase at a diminishing rate. The marginal revenue remains constant if the production of an extra unit does not add to the value of the revenue realized in the firm....

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