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:
    • AC (Q) = TC(Q)/Q
  • profit margin:
    • (P-AC(Q))
  • thinking on the margin = profits are maximized when the monopolist sets MR = MC

Steps to Finding Components on a Graph

  1. given the demand curve, find marginal revenue curve
  2. given total cost curve, find the marginal cost curve
  3. equate marginal revenue to marginal cost

   

  1. determines quantity produced
    1. given quantity produced, find corresponding price associated with the quantity produced (demand curve)
    2. determine revenues
    3. determine costs
    4. calculate profits

Example of Steps

  1. MR = 20-4Q
  2. MC = 8
  3. MR = MC

   

  1. Q = 3
    1. P = 20-2(3) = 14
    2. PQ = 14(3) = 42
    3. TC (Q) = 8(3) = 24
    4. profits = 18