AP_Krugman_Textbook

Using Marginal Analysis to Choose the

Profit-Maximizing Quantity of Output

Theprinciple of marginal analysisprovides a clear message about when to stop
doing anything: proceed until marginal benefitequals marginal cost. To apply this princi-
ple, consider the effect on a producer’s profit of increasing output by one unit. The
marginal benefit of that unit is the additional revenue generated by selling it; this
measure has a name—it is called the marginal revenueof that output. The general for-
mula for marginal revenue is:

(53-3) Marginal revenue ==

or

MR=ΔTR/ΔQ

In this equation, the Greek uppercase delta (the triangular symbol) represents the
change in a variable.
The application of the principle of marginal analysis to the producer’s decision
of how much to produce is called the optimal output rule,which states that profit
is maximized by producing the quantity at which the marginal revenue of the
last unit produced is equal to its marginal cost. As this rule suggests, we will see that
Jennifer and Jason maximize their profit by equating marginal revenue and mar-
ginal cost.
Note that there may not be any particular quantity at which marginal revenue ex-
actly equals marginal cost. In this case the producer should produce until one more
unit would cause marginal benefit to fall below marginal cost. As a common simplifi-
cation, we can think of marginal cost as rising steadily, rather than jumping from one
level at one quantity to a different level at the next quantity. This ensures that marginal
cost will equal marginal revenue at some quantity. We employ this simplified approach
in what follows.
Consider Table 53.2 on the next page, which provides cost and revenue data for Jen-
nifer and Jason’s farm. The second column contains the farm’s total cost of output.

Change in total

revenue generated

by one additional

unit of output

Change in total revenue

Change in quantity of output

module 53 Profit Maximization 537

Section

(^10)
(^) Behind
(^) the
(^) Supply
(^) Curve:
(^) Profit,
(^) Production,
(^) and
(^) Costs
Profit for Jennifer and Jason’s Farm When Market Price Is $18
Quantity of
tomatoes
Q Total revenue Total cost Profit
(bushels) TR TC TR − TC
0 $0 $14 −$14
11830 − 12
2363 6 0
3544410
4725616
5907218
6 108 92 16
7 126 116 10
table53.1
According to the principle of marginal
analysis,every activity should continue until
marginal benefit equals marginal cost.
Marginal revenueis the change in total
revenue generated by an additional unit
of output.
Theoptimal output rulesays that profit
is maximized by producing the quantity
of output at which the marginal revenue
of the last unit produced is equal to its
marginal cost.