How is then profit maximized?

Any producer keeps on producing a given product as long as the marginal return or price or the
average revenue obtained from the employment of the variable input is larger than the marginal
cost (MR>MC). Even if we know from the production theory that the rational firm produces at
Stage II, where the marginal product of a variable input is decreasing, we do not exactly know
the level of output the firm should produce.

The decision on how much to produce is determined by the maximum level of profit that could
potentially obtained from the production process. The amount of total profit is at its maximum
when the marginal profit is zero. Put differently, when the marginal cost (the slope of the cost
curve) equals to the marginal revenue (the slope of the total revenue curve), total profit will be at
its maximum.[NB. when a certain function reaches a maximum/minimum point, its marginal
value (slope) is zero at this extreme point]
M arg inal M arg inal M arg inal
0
Pr ofit Re venue Cost

MR MC P
Example: the corn production of firm A and firm B is given as follows
No of Price Total Total
input of Variable fixed Total Corn Price of Total
Firms used input cost cost cost output output revenue
A 200 0.2 40 150 190 116.3 2 232.6
B 260 0.2 52 150 202 124.3 2 248.6
A* 240 0.2 48 150 198 122.2 2 244.4
B* 280 0.2 56 150 206 125.6 2 251.2

If A wants to increase his output from its current level to, say 122.2 units, for the additional 5.9
units he needs to spend an additional cost of 8.00 Birr (Total cost of A - Total cost of A* = 198-
190) or 1.36 Birr /unit (8/5.9) of marginal cost. This value of 1.36 Birr is still less than the
marginal revenue of birr 2.00. Similarly, the increase in total revenue (244.4-232.6=11.8) is
higher than the increase in total cost (198-190=8.00). Thus at this level of production profit
increases by Birr 3.80 and the decision will be to produce the amount given by A*
What should be the decision about firm B? Why? Compare your answer with MC=3.08 and
MR=2.00.
The Break-even Point
At some specific output price the firm doesnt make any profit at the profit maximizing level of
output where MR=MC=AC. The corresponding level of output is then referred to as the break-
even point. For example if the price falls to Birr 63 in the above case then at that level of output
there will be zero economic profit or normal profit (the firm earns exactly its implicit cost). The
firm, despite making zero profit, prefers to operate rather than closing down since this way of
production covers its fixed costs fully.

The Shutdown Case

If the price falls further down to Birr 30 at this price MR is just equal to AVC, i.e., the firm is
losing money that amounts to the fixed costs. At this price the firm is indifferent between
operating and ending operations. If the price falls below this level, then the firm will incur a loss
and it is preferable shutting down to operating at a loss. But for the price above this closedown
price the firm minimizes its loss by operating rather than closing down. Thus, when MR=MC=
AVC, the level of output is referred to as the shutdown point.
Pure Monopoly
The Basics of Monopoly
A pure monopolist is the sole supplier of a product or service for which there are no close
substitutes
Monopolies exist because of entry barriers such as economies of scale, patents and
licenses, and the ownership of essential resources
The monopolists demand curve is downward sloping, and its marginal-revenue curve
lies below its demand curve