Marginal Revenue, Average Costs, and Graph Components
Marginal Revenue
- when the inverse demand curve is linear, there’s a simple way to find the profit maximizing level of output
- linear inverse demand curve:
- P = a-b x Q
- marginal revenue curve schedule:
- MR = a-2b x Q
- profit maximization happens when MR = MC or a-2b = MC
Monopolist Average Costs
- average cost formula:
- profit margin:
- thinking on the margin = profits are maximized when the monopolist sets MR = MC
Steps to Finding Components on a Graph
given the demand curve, find marginal revenue curve
given total cost curve, find the marginal cost curve
equate marginal revenue to marginal cost
- determines quantity produced
given quantity produced, find corresponding price associated with the quantity produced (demand curve)
determine revenues
determine costs
calculate profits
Example of Steps
MR = 20-4Q
MC = 8
MR = MC
- Q = 3
P = 20-2(3) = 14
PQ = 14(3) = 42
TC (Q) = 8(3) = 24
profits = 18