F.

4 NSS Micro Econ

Supplementary Notes 11
Profit maximization and output determination
Introduction:
⚫ The key objective of most public enterprises is providing essential goods and services to the
public free of charge or at __________ prices. They do not aim at making _________.
⚫ For private enterprises, some have non-profit making objectives but most of them aim at
maximize profits.
⚫ Assumption in this chapter: we will study how private firms can maximize profits in a
price-taking market (or ____________ _______________ market).

A. Objectives of private enterprises

(1) Profit maximization
⚫ The entrepreneurs make business decision to maximize ____________.
⚫ Profit = ________________ - ________________. It is the net receipt of the firm or the
return for ____________________.

(2) Market share maximization

⚫ Market share means the percentage of its product sales to the total product sales of that
industry. It can be measured in terms of either dollar sales or unit sales.
⚫ Market share (in terms of dollar sales) = Dollar sales of a firm
OR Total dollar sales in the whole industry
⚫ Market share (in terms of unit sales) = Unit sales of a firm
Total unit sales in the whole industry
⚫ A firm increases its market share in terms of dollar sales is to maximize total revenue while if
a firm wants to capture more market share by increasing unit sales is to maximize output.
⚫ Methods to achieve market share maximization:
___________________________________________________________________________
⚫ Advantages of maximizing market shares: The firms can affect the ____________________,
enjoy ______________________, earn higher returns, etc.
⚫ However, a firm with the largest market share may not be the one making the most money
because the firm may make non-profitable decision, e.g. they may offer excessive price
discounts. Therefore, sales maximization does not imply profit maximization.

(3) Corporate social responsibility

⚫ This refers to a firm’s responsibility to society. The firm has to consider its responsibility to
different stakeholders (e.g. ____________, ___________, ____________, ____________, etc)
when making business decisions.
⚫ E.g. to the environment, they should implement policies to protect the _______________ and
avoid causing environmental damage. To the employees, they should treat their employees
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 fairly and reward them with reasonable pay.
⚫ Corporate social responsibility does not necessarily conflict with profit maximization.
Although some firms may give up short-term profit to achieve corporate social responsibility,
such action can help to build up a good corporate ______ and goodwill, gaining long-term
___________. Therefore, fulfilling social responsibility can be regarded as a way to gain
profit in long term.

(4) Provision of non-profit making goods and services

⚫ To serve the needs of targeted groups for non-profit making purposes. They even charge
below costs. E.g. Oxfam.

Remarks:
⚫ Under competition, only those firms whose behaviour is profit-maximizing can survive,
expand and become the majority in the market in the long run.
⚫ Thus profit maximization is assumed to be the major objective of most private enterprises.

B. Definition and features of price-taking markets (or perfect competition market)

⚫ We will assume all private firms are in a price-taking market.
⚫ In a price-taking market, individual sellers cannot influence the market price. They have to
take or follow the _______ ________ that the market determines and sell at the market price.

Conditions of a Price-taking market

1. A large number of sellers
⚫ As a large number of sellers exist in the market, an individual seller ___________ influence
the market price.

2. Homogeneous goods
⚫ Buyers regard the goods sold by each and every seller as exactly ________________; and
they have no particular preference for the good sold by any one seller.
⚫ As goods in a price-taking industry are ________________, any firm selling at a higher price
(would/ would not) lose all its customers.

3. Perfect information
⚫ Due to perfect information, so all buyers know the price charged by each seller, no buyers buy
an identical product from sellers charging a higher price.
⚫ Accordingly, a _____________ price for the product must prevail in the market.

4. Free entry and exit

⚫ New firms can enter the market freely without any restrictions. Similarly, firms may leave the
market whenever they like.
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C. Profit-maximizing choice of output
⚫ In maximizing profit, sellers cannot adjust their prices as they wish, but they can change their
outputs, i.e. they can choose the ___________ they sell at the given market price.
⚫ The output or quantity supplied at which a seller can maximize his or her profit is called the
profit-maximizing output.
⚫ There are two approaches to determine the profit-maximizing output:
(a) total revenue and total cost approach
(b) marginal revenue and marginal cost approach

1st approach to find the profit maximization output:

(1) Total revenue (TR) and total cost (TC) approach
⚫ Total revenue (TR) = _____________________________
⚫ Total cost (TC) = Total fixed cost + Total variable cost. i.e. the cost of producing the total
amount of output.
⚫ Total profit = ___________________________
⚫ According to this approach, the profit maximizing output is the output at which the
difference between TR and TC is the largest.

Price ($) Output (units) Total revenue ($) Total cost ($) Total profit ($)
8 0 0
8 1 3
8 2 7
8 3 12
8 4 18
8 5 25
8 6 33
8 7 42
8 8 52

⚫ The table shows the profit-maximizing output is _______ units and the profit is _______.

Question:
What is the profit-maximizing output?
Price ($) Output (units) Total revenue ($) Total cost ($) Total profit ($)
5 4 20
5 5 22
5 6 26
5 7 32
⚫ The table shows the profit-maximizing output is _______ units and the profit is _______.

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Exercise: The first approach -
Total revenue and total cost approach to find the profit maximization output:

1. What is the profit-maximizing output?

Price ($) Output (units) Total revenue ($) Total cost ($) Total profit ($)
2 13 19
2 14 20
2 15 21
2 16 24

⚫ The table shows the profit-maximizing output is _______ units and the profit is _______.

2. What is the profit-maximizing output?

Price ($) Output (units) Total revenue ($) Total cost ($) Total profit ($)
10 16 120
10 17 123
10 18 128
10 19 138
10 20 155

⚫ The table shows the profit-maximizing output is _______ units and the profit is _______.

3. What is the profit-maximizing output?

Price ($) Output (units) Total revenue ($) Total cost ($) Total profit ($)
10 1 6
10 2 13
10 3 21
10 4 30
10 5 42
10 6 56

⚫ The table shows the profit-maximizing output is _______ units and the profit is _______.

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2nd approach to find the profit maximization output:
(2) Marginal revenue (MR) and marginal cost (MC) approach
⚫ Marginal revenue (MR) is equal to the change in total revenue (TR) from selling an extra unit
of output. Since price-takers cannot affect the market price, each unit of its output is sold at
the same price, so the MR is the same and equal to its ____________. i.e. MR = P (= AR)
⚫ Marginal cost (MC) is equal to the change in ________ for producing an extra unit of output.
⚫ According to this approach, the profit maximizing output is the output at MR = MC as the
profit can be the greatest.

Complete the following table and find the profit-maximizing output.

Price ($) Output Total Total cost Marginal Marginal Total
(units) revenue (TC) ($) revenue Cost Profit ($)
(TR) ($) (MR) ($) MC ($)
8 0 0
8 1 3
8 2 7
8 3 12
8 4 18
8 5 25
8 6 33
8 7 42
8 8 52
⚫ The table shows the profit-maximizing output is _______ units. It is same as the one obtained
using the total revenue and total cost approach.

⚫ If MR > MC → A firm can increase profit by ______________ output.

⚫ If MR < MC → A firm can increase profit by ______________ output.
⚫ If MR = MC → Profit will be maximized.

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Exercise: The second approach – Marginal revenue and marginal cost approach to find the
profit maximization output:
1. Complete the following table and find the profit-maximizing output.
Price ($) Output Marginal Marginal Total Total Total
(units) revenue ($) cost ($) revenue ($) Cost ($) Profit ($)
4 8 15
4 9 18
4 10 20
4 11 21
4 12 22
4 13 25
4 14 29
4 15 36
⚫ The profit-maximizing output is ______ units and the corresponding total profit
= ______________________________________________________________________.

2. Assume the fixed cost is $2 and the price of the product is $10. What is the profit-maximizing
output?
Output (units) Marginal cost ($)
1 2
2 4
3 6
4 8
5 10
6 12
⚫ The profit-maximizing output is _____ units and the corresponding total profit
= ________________________________________________________________________.

3. Complete the following table and find the profit-maximizing output.

Price ($) Output (units) Total cost ($)
9 4 30
9 5 36
9 6 43
9 7 51
9 8 60
9 9 70
⚫ The profit-maximizing output is ______ units and the corresponding total profit
= ______________________________________________________________________.

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D. Marginal cost schedule = Supply schedule
⚫ Marginal cost (MC) curve is upward sloping as marginal cost is rising when output is rising.
⚫ Supply (S) curve is a curve relates price
to quantity supplied.
⚫ The MC schedule of a firm
can be interpreted as its supply (S) schedule
in the production of a good because
we can tell the quantity of the good the firm
plans to produce from the MC schedule
given the price of the good.

⚫ Since MC is rising when output is rising, a firm in a price-taking market can maximize its
profit when it produces at the output level where _________ = _________. Then all the units
with MC < MR are produced.
⚫ Since MR = _______ in price-taking firms. So MR = MC means _______ = MC in this case.
⚫ Therefore, the profit-maximizing outputs at different prices are actually the quantities on the
marginal cost schedule whose MCs are equal to prices.
⚫ Hence, the supply schedule of a firm is actually the marginal cost schedule of the firm.

Marginal cost schedule Supply schedule

Output Total cost ($) Marginal cost ($) Price ($) Quantity
(units) supplied
(units)
6 65 ---
7 75
8 87
9 101
10 117

⚫ When the price is $12 per unit, the producer will produce _______ units. When the price
is $14 per unit, the producer will produce _________ units.
⚫ This shows that his quantity supplied of the good X ___________ as price __________.

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Question: Based on the following marginal cost schedule of a firm, find its supply schedule.
Explain your answer.
Marginal cost schedule Supply schedule
Output (units) Marginal cost ($)
2 1
3 2
4 3
5 4
6 5
7 6

⚫ The profit maximizing output is the output where __________ = ___________.

⚫ When the market price is $1, the profit-maximizing output will be ______ units because
at this output MC = MR = P = _________.
Next, suppose the price is $2, the profit-maximizing output will be ____ units, and so on.
⚫ Thus, the supply curve is derived from the __________________________ curve.

Question:
The following table shows the output and total cost of bread. Derive the supply schedule.
Output (units) Total cost ($)
1 6
2 13
3 21
4 30
5 42
6 56

Supply schedule:

⚫ When the price increases to $9, how many units of bread will the bakery produce?
⚫ When the price decreases to $7, how many units of bread will the bakery produce?

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 Exercise on finding profit-maximization output:
1. Complete the following table and find the profit-maximizing output.
Price ($) Output Total Marginal Marginal
(units) cost ($) revenue($) cost($)
3 21 50 --
3 22 1.2
3 23 1.6
3 24 1.8
3 25 2.4
3 26 3
3 27 3.6
3 28 4.4
⚫ The table shows the profit-maximizing output is _______ units and the corresponding total
profit = __________.

2. Complete the following table and find the profit-maximizing output.

P($) Output Total Marginal Total Marginal Total
(units) revenue($) revenue($) cost($) cost($) profit($)
4 5 8 --
4 6 10
4 7 11
4 8 15
4 9 21
4 10 30
⚫ The table shows the profit-maximizing output is _______ units and the corresponding total
profit = __________.

3. Suppose the price-taking firm has no fixed cost of production and charges a uniform price of
$5. Complete the following table and find the profit-maximizing output.
Output Marginal
(units) cost ($)
1 3
2 4
3 5
4 6
5 7
6 8
⚫ The profit-maximizing output is ________ units, at which ______ = _______ and the
maximum profit = __________

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4.
Price ($) Output (units) Average revenue ($) Average cost ($) Total profit($)
= (AR-AC)* Q
1 10 1
2 10 3
3 10 5
4 10 7
5 10 9
6 10 11
⚫ The table shows the profit-maximizing output is _______ units and the total profit at the
profit-maximizing output is _______.

5.
Output (units) Average revenue ($) Average cost ($)
1 10 7
2 10 7.5
3 10 8
4 10 8.5
5 10 9
6 10 9.5
⚫ The table shows the market price of the output is ___________, the profit-maximizing output
is _______ units and the total profit at the profit-maximizing output is _______.

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Extended tasks:
6. Fill in the following table.
Price ($) Output (units) MR ($) MC ($)
10 1 6
10 2 7
10 3 8
10 4 9
10 5 10
10 6 11
10 7 12
10 8 13
(a) Find the profit maximizing output level
- By MR and MC approach, the profit maximizing output level = ____________ .

(b) Suppose the government imposes a per unit tax of $2, find the new profit-maximizing output.
Price ($) Output (units) MR ($) MC ($) New MC after tax ($)
10 1 6
10 2 7
10 3 8
10 4 9
10 5 10
10 6 11
10 7 12
10 8 13
The profit maximizing output level ________ to ________ units and the corresponding profit rise/
drop.

(c) Suppose the government imposes a lump-sum tax of $2 regardless of the output level, find the
new profit-maximizing output.
Price ($) Output (units) MR ($) New MC after tax ($) = _________________
10 1
10 2
10 3
10 4
10 5
10 6
10 7
10 8
The profit maximizing output level remains unchanged at _____ units and the profit rise/ drop.
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Conclusion:
⚫ Under perfect competition, the per-unit tax (or increase in variable cost) will _____________
the marginal cost, so profit maximizing output level will ________________.
⚫ The lump-sum tax (or any change of fixed cost) under perfect competition, marginal cost will
__________________, so profit maximizing output level will __________.

MC Exercise:
1. The following table shows the data for a firm operating in a price-taking market. Zero fixed
cost is assumed.
Price Output (units) Total cost ($)
7 3 12
7 4 18
7 5 25
7 6 33
7 7 42
7 8 52
7 9 63
What is the profit-maximizing output?
A. 4 units
B. 5 units
C. 6 units
D. 7 units

2. Refer to the table in question 1. Suppose the government imposes a per unit sales tax of $1.
What is the new profit-maximizing output?
A. 4 units
B. 5 units
C. 6 units
D. 7 units

3. The following table shows the information for a price-taking firm $2.
Output (units) Average revenue ($) Average cost ($)
1 10 7
2 10 7.5
3 10 8
4 10 8.5
5 10 9
6 10 9.5
Suppose the fixed cost is $2, what is the total profit at the profit-maximizing output?

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 A. $3
B. $4
C. $5
D. $6

4. For a firm in a perfectly competitive market,

(1) it is a price taker.
(2) its marginal cost schedule is identical to its supply schedule.
(3) its marginal revenue is equal to the market price.
A. (1) only
B. (1) and (2) only
C. (2) and (3) only
D. (1), (2) and (3)

5. If Firm A wants to increase its market share in terms of dollar sales while Firm B wants to
capture more market share by increasing unit sales, they are aiming to maximize
______________ and ______________, respectively.
A. profit; market share
B. sales revenue; profit
C. sales revenue; output
D. output; revenue

Q&A
1. The following table shows the production cost data of a price-taking toy factory:
Current output (units) 40
Marginal cost ($) 30
Average variable cost ($) 20
Fixed cost ($) 50
Suppose the market price of the toys produced by the factory is $25.
(a) What is the profit of the factory at the current output level? (2 marks)
(b) Briefly explain whether the factory should increase or decrease output if it aims to
maximize profits. (2 marks)

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2. (a) Suggest TWO possible objectives of a firm besides profit-maximization. (2 marks)
(b) The following is the total cost schedule of a price-taking firm.
Output (units/ period) Total cost ($)
0 2
1 3
2 6
3 10
4 16
5 23
6 31
At a market price of $7, find the profit-maximizing output and the profit of the firm. (2 marks)

Suggested answer:
MC:
1B, 2A, 3D, 4D, 5C

Q&A:
1.
a. Profit = $150
b. Since MC is higher than the price, so the firm can raise the profit by decreasing the output.

2a.
Market share maximization/ corporate social responsibility/ provision of non-profit making
goods and services
2b.
Output (units/ period) Total cost ($) Marginal cost ($)
0 2 --
1 3 1
2 6 3
3 10 4
4 16 6
5 23 7
6 31 8
Output = 5 ; Profit = $12
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 Answer:
Total revenue and total cost approach (p.4)

⚫ What is the profit-maximizing output?

Price ($) Output (units) Total revenue ($) Total cost ($) Total profit ($)
2 13 26 19 7
2 14 28 20 8
2 15 30 21 9
2 16 32 24 8

⚫ The table shows the profit-maximizing output is __15___ units and the profit is ___$9____.

2. What is the profit-maximizing output?

Price ($) Output (units) Total revenue ($) Total cost ($) Total profit ($)
10 16 160 120 40
10 17 170 123 47
10 18 180 128 52
10 19 190 138 52
10 20 200 155 45

⚫ The table shows the profit-maximizing output is ___19__ units and the profit is ___$52____.

⚫ What is the profit-maximizing output?

Price ($) Output (units) Total revenue ($) Total cost ($) Total profit ($)
10 1 10 6 4
10 2 20 13 7
10 3 30 21 9
10 4 40 30 10
10 5 50 42 8
10 6 60 56 4

⚫ The table shows the profit-maximizing output is __4_____ units and the profit is _$10____.

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Marginal revenue and marginal cost approach (p.6)
1. What is the profit-maximizing output?
Output (units) Marginal revenue ($) Marginal cost ($)
1 10 2
2 10 4
3 10 6
4 10 8
5 10 10
6 10 12
⚫ The profit-maximizing output is ___5_____ units, at which _MR_____ = __MC_____ and
the corresponding total profit = ____$20______.

2. Complete the following table and find the profit-maximizing output.

Price ($) Output TR ($) TC ($) Total MR ($) MC ($) Marginal
(units) profit ($) Profit ($)
4 8 32 15 17 4 -- --
4 9 36 18 18 4 3 1
4 10 40 20 20 4 2 2
4 11 44 21 23 4 1 3
4 12 48 22 26 4 1 3
4 13 52 25 27 4 3 1
4 14 56 29 27 4 4 0
4 15 60 36 24 4 7 -3
⚫ The profit-maximizing output is __14____ units and the corresponding total profit = __$27_.

3. Complete the following table and find the profit-maximizing output.

P($) Q Marginal Marginal cost Marginal Total profit($)
revenue($) ($) profit($) (=TR-TC)
(= P) = MR – MC
9 1 9 8 1 1
9 2 9 7 2 3
9 3 9 6 3 6
9 4 9 5 4 10
9 5 9 6 3 13
9 6 9 7 2 15
9 7 9 8 1 16
9 8 9 9 0 16
9 9 9 10 -1 15
⚫ The table shows the profit-maximizing output is ___8____ units and the profit = $16.

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General exercise P. 9-13
1. Complete the following table and find the profit-maximizing output.
Price ($) Output Total cost Marginal Marginal
(units) ($) revenue ($) cost ($)
3 21 50 3 --
3 22 51.2 3 1.2
3 23 52.8 3 1.6
3 24 54.6 3 1.8
3 25 57 3 2.4
3 26 60 3 3
3 27 63.6 3 3.6
3 28 68 3 4.4
⚫ The table shows the profit-maximizing output is ___26____ units and the corresponding total
profit = __$(26*3) - $60 =_$18_______ which is the greatest.

2. Complete the following table and find the profit-maximizing output.

Price ($) Output Total Marginal Total cost Marginal Total
(units) revenue($) revenue($) ($) cost ($) profit($)
4 5 20 4 8 -- 12
4 6 24 4 10 2 14
4 7 28 4 11 1 17
4 8 32 4 15 4 17
4 9 36 4 21 6 15
4 10 40 4 30 9 10
⚫ The table shows the profit-maximizing output is __8_____ units and the corresponding total
profit = __$17________.

3. Suppose the price-taking firm has no fixed cost of production and charges a uniform price of
$5. Complete the following table and find the profit-maximizing output.
Output Marginal Marginal
(units) cost ($) revenue ($)
1 3 5
2 4 5
3 5 5
4 6 5
5 7 5
6 8 5
⚫ The profit-maximizing output is ____3____ units, at which MR ($5) = MC ($5) and the
maximum profit = _____$(5*3) - $(3+4+5) = $3_____.

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4.
Price ($) Output Average Average Total
(units) revenue ($) cost ($) Profit($)
10 1 10 1 9
10 2 10 3 14
10 3 10 5 15
10 4 10 7 12
10 5 10 9 5
10 6 10 11 -6
⚫ The table shows the profit-maximizing output is ___3____ units and the total profit at the
profit-maximizing output is ___$15____.
5.
Output (units) Average revenue Average cost ($) Total profit ($)
($)
1 10 7 3
2 10 7.5 5
3 10 8 6
4 10 8.5 6
5 10 9 5
6 10 9.5 3
⚫ The table shows the market price of the output is ___$10________, the profit-maximizing
output is __4_____ units and the total profit at the profit-maximizing output is __$6_____.

Extended tasks:
6. Fill in the following table.
Price ($) Output (units)TR ($) MR ($) TC ($) MC ($) Total profit ($)
10 1 10 10 6 6 4
10 2 20 10 13 7 7
10 3 30 10 21 8 9
10 4 40 10 30 9 10
10 5 50 10 40 10 10
10 6 60 10 51 11 9
10 7 70 10 63 12 7
10 8 80 10 76 13 4
(a) Find the profit maximizing output level by using (i) the total revenue and total cost approach;
(ii) the marginal revenue and marginal cost approach.
By TR and TC approach, the profit maximizing output level = ____5________.
By MR and MC approach, the profit maximizing output level = ___5_________.
The corresponding total profit = _____$10_________.

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(b) Suppose the government imposes a unit sales tax of $2, find the new profit-maximizing output
and the corresponding total profit by using
(i) the total revenue and total cost approach;
(ii) the marginal revenue and marginal cost approach.

(i) The total revenue and total cost approach:

Price ($) Output (units) TR ($) Old TC ($) New TC ($) New total profit ($)
10 1 10 6 + 2 =8 2
10 2 20 13 + 4 =17 3
10 3 30 21 + 6 =27 3
10 4 40 30 + 8 =38 2
10 5 50 40 + 10 =50 0
10 6 60 51 + 12 =63 -3
10 7 70 63 + 14 =77 -7
10 8 80 76 + 16 =92 -12

By TR and TC approach, the profit maximizing output level = _____3_______ and the
corresponding total profit = ____$3__________.

(ii) The marginal revenue and marginal cost approach:

Price ($) Output (units) MR ($) Old MC ($) New MC ($)
10 1 10 6 +2 = 8
10 2 10 7 +2 =9
10 3 10 8 +2 =10
10 4 10 9 +2 =11
10 5 10 10 +2 =12
10 6 10 11 +2 =13
10 7 10 12 +2 =14
10 8 10 13 +2 =15

By MR and MC approach, the profit maximizing output level = _____3_______ and the
corresponding total profit = ______$(10*3) - $(8+9+10) = $3________.

Conclusion:
⚫ When there is per-unit tax under perfect competition, marginal cost will be ________, so
profit maximizing output level will ____________.
⚫ The per-unit tax will __________ the total profit of the firm.

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(c) Suppose the government imposes a lump-sum sales tax of $2, find the new profit-maximizing
output and the corresponding total profit by using
(i) the total revenue and total cost approach;
(ii) the marginal revenue and marginal cost approach.

(i) The total revenue and total cost approach:

Price ($) Output (units) TR ($) Old TC ($) New TC ($) New total profit ($)
0 0 0 0 2 --
10 1 10 6 +2 =8 2
10 2 20 13 +2 =15 5
10 3 30 21 +2 =23 7
10 4 40 30 +2 =32 8
10 5 50 40 +2 =42 8
10 6 60 51 +2 =53 7
10 7 70 63 +2 =65 5
10 8 80 76 +2 =78 2
By TR and TC approach, the profit maximizing output level = ______5______ and the
corresponding total profit = _______$8_______.

(ii) The marginal revenue and marginal cost approach:

Price ($) Output (units) MR ($) New MC ($) =
Old MC
10 1 10 8-2=6
10 2 10 15 - 8 = 7
10 3 10 23 - 15 =8
10 4 10 32 - 23 =9
10 5 10 42 – 32 = 10
10 6 10 53 – 42 =11
10 7 10 65 – 53 =12
10 8 10 78 – 65 =13
By MR and MC approach, the profit maximizing output level = ____5________ and the
corresponding total profit = $(5*10) - $(6+7+8+9+10) -$2 = $8

Conclusion:
⚫ When there is lump-sum tax (or any change of fixed cost) under perfect competition, marginal
cost will __________________, so profit maximizing output level will
_____________________.
⚫ The ump sum tax will ____________ the total profit of the firm.

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