Thursday, December 3, 2009

Should a producer really make up to the point where MR=MC?

Hypothetical situation, producer makes TV.


5 TV sold, MR= 15 and MC= 12, net profit = 300.


6 TV sold, MR= 15 and MC= 15, net profit is still = 300.





If the producer knows this information, what's the incentive to making the 6th TV?Should a producer really make up to the point where MR=MC?
6-th TV will mean higher market share - thus potential for higher profits in future (depends on market life-cycle) thus possibly gains from economies of scale (higher specialization in company - and consequently average costs reduction in longer-run).





But of course it all depends on certain market stability and availability of extra resources to finance current assets, costs of storage, different risks, opportunity costs, level of competition, input and product price volatility, etc.Should a producer really make up to the point where MR=MC?
MR=MC defines the output and price of a monopoly


Profit=P(Q)Q-C(Q)


dPr/dQ= dP(Q)/dQ Q -dC(Q)/dQ=0





dP(Q)/dP Q=MR


dC(Q)/dQ=MC





Otherwise, it would not maximize its profit

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