What are the two methods to determine the profit-maximizing quantity of output?

Question

What are the two methods to determine the profit-maximizing quantity of output? Ian offers his mowing services in the perfectly competitive lawn mowing industry. He has fixed cost of $7 per day (the cost of renting the mower) and variable costs as shown in the accompanying table. Complete the table. If the market price is $9 per lawn how many lawns will Ian mow? What is his profit? If the market price is $3.60, what is optimal quantity? Profit? If the market price is $2, what is optimal quantity and profit? If the market price is $1, what is optimal quantity and profit? Complete the table for Ian's costs and graph ATC, AVC, MC.

Explanation / Answer

5.

Methods of profit-maximizing quantity of output:

1. Marginal cost (MC) – Marginal revenue (MR) method: In this method, MC should equal to MR to get the profit-maximizing quantity of output. The MC curve should cut the MR curve from below and goes upward.

2. Total revenue (TR) – Total cost (TC) method: Profit = TR – TC. In this method, a table of profit at different output level should be prepared. The quantity relating to highest profit among the lot should be considered as profit-maximizing quantity of output.

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