Profit maximization involves a company using a long or short ran procedure that determines the cost and productivity level, which would gain the maximum proceeds. Profit would be equivalent to the total revenue (TR) minus the total cost (TC). Where the difference is the highest is where profit maximization is.
The profit calculation for marginal revenue (MR) to marginal cost (MC) is different. The company will compare the marginal revenue they receive from selling a single widget to the marginal cost of producing another widget, and how much cost it adds to the total revenue and total costs. Basically, take the total cost of the last product produced and minus the total cost of the product before that.
Marginal revenue is calculated by dividing the change in the total revenue by the change in the amount or quantity sold (Q). Additionally, you can take the total revenue for an amount of widgets and subtract the total revenue of one less widget. For the given scenario marginal revenue decreases for each widget that is increased by one. As the scenario only goes up to 15 widgets produced, if more than 15 were produced you would eventually see the marginal revenue decrease until it was negative.
Marginal cost is the total amount it would cost to produce another widget. This is calculated by taking the total cost of the widget and then subtracting the total cost of producing one less widget. In the given scenario marginal costs is increased as each widget is produced. The more number of widgets that are produced the cost of each additional widget costs ten dollars more.
Maximum profit for the company occurs at eight widgets when using the marginal revenue and marginal cost approach. If the marginal revenue becomes greater than the marginal cost then the production should be increased until the marginal cost of the last widget produced equals to the marginal revenue. So, increase output until (MR) = (MC) to produce widgets to achieve maximum profit....