Egt1 Task 1 Essay

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EGT1 - Economics Subdomain: 309.1 - Task 1 A. Profit Maximization a1. The total revenue (TR) to total cost (TC) approach relies on the fact that profit equals revenue minus that cost and focuses on maximizing the greatest difference between TR and TC. Total Revenue (TR): Is the income derived from the sales of a given product. (McConnell., 2011) This total does not take include the cost of producing the product. The calculation of the TR is accomplished by multiplying the number of units sold time the sales price. * TR = Sales Price * Quantity Sold Total Cost (TC): The sum of fixed cost and variable cost at each level of output. (McConnell., 2011) * TC = TFC + TVC (Total cost = Total Fixed Cost + Total Variable Cost) * Graphically speaking the total revenue curve rises, but at a decreasing rate – the curve turns into more of a horizontal line. Ultimately, total revenue begins to decrease. a2. The marginal revenue (MR) to marginal cost (MC) approach uses marginal analysis by comparing (MR) and (MC). Marginal Cost (MC): The change in total cost as the output level changes one unit. (McConnell., 2011) Marginal Revenue (MR): The change in total revenue from the sale of one additional level of output. (McConnell., 2011) * MR = (change in total revenue) / (change in quantity/output) or MR = ∆TR / ∆Q If a company is a price maker, the sale of each additional widgets they produce ads to total revenue the same amount that is equal to the selling price. Thus, marginal revenue equals the same selling price that the firm views as a linear demand curve. * Graphically, MR is a horizontal line equal to marketplace price, and MC creates a J-shaped pattern. * To establish the profit-maximizing output level, firms use the MR=MC Rule: The firm maximizes profit or minimizes loss by producing the output where marginal

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