Unit 3:�Production, Costs, and Perfect Competition

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Copyright

ACDC Leadership 2019

Topic 3.5-

Profit Maximization

MR = MC is the single most important concept for the AP Micro exam.

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For example, on the 2017 exam, nearly 1/6th of the multiple choice questions required that students understand that MC = MR is the profit-maximizing rule and 2 of the 3 FRQ’s did as well.

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Teacher Tip

Machine Analogy

Imagine a machine that gives you $40 whenever you insert cash.

The only rule is that the value of the money you insert must be higher than the previous amount you inserted.

1. How much are you willing to pay?
2. How much are you definitely NOT willing to pay?
3. What does this teach about how to maximize profit?

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$12

$10

$8

$6

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Marginal Cost

1. Assume every unit can be sold for $10. Which unit maximizes profit?
2. Use marginal analysis to explain why you should never produce 5 units

Marginal

Revenue

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Quantity

Price

Short-Run Profit Maximization

What is the goal of every business?

To Maximize Profit!!!!!!

• To maximum profit firms must make the right output
• Firms should continue to produce until the additional revenue from each new output equals the additional cost.

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Example (Assume the price is $10)

• Should you produce…

…if the additional cost of another unit is $5

…if the additional cost of another unit is $9

…if the additional cost of another unit is $11

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Profit Maximizing Rule

MR=MC

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1995 Exam