ECONOMIC SECOND EDITION in MODULES S Paul Krugman Robin Wells with Margaret Ray and David Anderson MODULE 17 53 Profit Maximization Krugman Wells Maximizing Profit 3 of 11 Maximizing Profit 4 of 11 Using Marginal Analysis to Choose the Profit Maximizing Quantity of Output Marginal revenue is the change in total revenue generated by an additional unit of output 5 of 11 The Optimal Output Rule The optimal output rule says that profit is maximized by producing the quantity of output at which the marginal cost of the last unit produced is equal to its marginal revenue 6 of 11 Short Run Costs for Jennifer and Jason s Farm 7 of 11 Marginal Analysis Leads to ProfitMaximizing Quantity of Output The firm s optimal output rule says that a firm s profit is maximized by producing the quantity of output at which the marginal cost of the last unit produced is equal to the market price The marginal revenue curve shows how marginal revenue varies as output varies 8 of 11 The Firm s Profit Maximizing Quantity of Output Price cost of bushel 24 Market line MC Optimal point 20 18 16 E MR P The profit maximizing point is where MC crosses MR curve horizontal line at the market price at an output of 5 bushels of tomatoes the output quantity at point E 12 8 6 0 1 2 3 4 5 6 Profit maximizing quantity 7 Quantity of tomatoes bushels 9 of 11 When Is Production Profitable Production is profitable when the firm s optimal quantity of output at the market price results in at least a normal profit 10 of 11 1 A producer chooses output according to the optimal output rule produce the quantity at which marginal revenue equals marginal cost 2 For a price taking firm marginal revenue is equal to price and its marginal revenue curve is a horizontal line at the market price It chooses output according to the firm s optimal output rule produce the quantity at which price equals marginal cost 11 of 11