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Assignment on Relationship Between Marginal Revenue and Marginal Cost

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Added on  2019-09-18

Assignment on Relationship Between Marginal Revenue and Marginal Cost

   Added on 2019-09-18

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Assignment on Relationship Between Marginal Revenue and Marginal Cost_1
Marginal revenue and marginal cost are critical to deciding price level. Explain-The measures of marginal cost of production, as well as the marginal revenue, are used to determine the level of price that the firm will charge as well as the amount of the output that the firm will be willing to supply for any given level of prices. This is a general statement that the sole aim of an organization is to achieve the maximum level of profits. The relationship that exists between the marginal revenue, as well as the marginal cost, are the important determinant that helps to find the point of profit maximization through the pricing mechanism. In other words, the point at which marginal revenue equals marginal cost is the point where the company maximizes its profit through charging a particular price level satisfying the equilibrium conditions. When we talk about the marginal cost of production, it measures the additional change in the total cost for a commodity that has been incurred from the production of an incremental unit of output. Thecalculation of marginal cost involves dividing the additional change in the total cost of production by one additional unit of output is produced (Posner, R. A., 1975). In the method of calculus, the calculation of marginal cost involves finding the first order derivative of any given function of total cost in respect of the quantity. Suppose that we are given that the total cost of production for ten units of the pen is $50 and further total cost of producing 11 units of the pen is $55. Now, the marginal cost of production for the 11th unit would be the change in the total cost of production that has taken place as a result of the additional production of one unit i.e. $5. When we talk about the marginal revenue, it is defined as the additions made to the revenue (whether positive or negative) that occurs when there is sale of additional unit of quantity that has been produced. Through the calculus method, the marginal revenue is defined as to be calculated in the form of first order derivative of the total revenue function with an additional unit of the quantity being produced. If suppose that the price of a pen is given to be $5 and in a company, there are 20 pens producedin each day then the total revenue is calculated by the product of the price with the total number of units produced i.e. 5*20 = $100. Now suppose Similarly if 21 units of a pen are sold then the total revenue will be $105. So, in this case, marginal revenue from selling 21st additional unit is $5. In the case of imperfect competition, the aim of every firm as we discussed above is to earn an optimum level of profits. This implies that they want to maximize the difference between their returns i.e. the total revenue as well as the total cost. As long as, the marginal revenue earned from the sale of a commodity is larger than the marginal cost associated with selling it, it will be profitable for the firm to pursue its sales (Baumol, W. J., & Blinder, A. S., 2015). However, just after the point wherethe marginal cost starts to exceed the marginal revenue, there will be lossesto the firm, and it will stop selling and producing. Now the important point to note here is thatthis relationship between marginal revenue as well as the marginal cost here will be crucial to the determination of the price level. This is shown as in figure 1.In figure 1, the marginal revenue curve, as well as the demand curve, are different from each other as well as downward sloping because under imperfect completion more output can only be sold by lowering the price
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