Answer to Question #290497 in Microeconomics for Khushi

Question

Explain the profit maximization situation using the TR,TC approach.

Answer 1

Based on  TR and TC approach, profit maximization states that a firm should produce output quantity at which difference between TR and TC is the maximum. The illustration below shows costs and revenue at each quantity and the profit-maximizing output is the one where differences reach maximum.

Q=1, TR=10, TC=15……then profit will be -5

Q=2 TR=20, TC=15 then profit will be 0

Q=3, TR= 40, TC= 35 then profit will be 15

Q= 4TR=50, TC=40 then profit will be 10

Looking on profit column, at Q=1, TR-TC is -5. This implies that there is loss at this output level since total cost is greater than total revenue. Therefore, the firm at this point must increase on output. At Q=4, TRR-TC is 15 and at Q=5, TR-TC is 10 which is a fall compared to Q=4. Therefore, it is clear that TR-TC is at maximum at Q=4. Therefore, the firm must make 4 units to maximize profits since TR-TC is maximum at 15.