Maximizing the Profit - Essay Example

The fall in the prices of butter could also be due to the changes in the supply and demand as when the prices started to increase, more and more producers will be willing to supply the butter in the market thus driving down the prices and restoring the equilibrium in the market.Another possible explanation of the same can be found in the substitute goods as when the price of butter is increasing, the demand for the substitute product i.e. margarine may also be increasing. However, when the demand for margarine has started to decrease, the price of butter also fell.

3In perfectly competitive markets there is a large number of sellers and buyers selling homogenous products. Further, everyone has complete information about the market. In such a situation, the economic profit will eventually disappear because when marginal cost equals marginal revenue (equilibrium condition in the perfect markets) the economic profits will be zero. Further, since there are a large number of sellers and buyers therefore if one producer charges higher, more sellers will come into the market and drive the profits down, and eventually, economic profit will disappear.

4The marginal principle states that profits will be maximized when marginal cost is equal to the marginal revenue. When marginal revenue is higher than the marginal cost, the producer will produce more units of goods and will eventually force the prices to come down to the level of marginal cost. Thus producer will decide the production of any good based on the marginal cost i.e. as long as it is lower than marginal revenue, the firm will adjust its production to achieve until both are equal.5No of UnitsPriceMarginal CostVariable CostTotal CostAverage Variable Cost100$22 $45 $2,500 $3,000 $25 The firm shut down point i.e. the point where the firm is indifferent between continuing production and shutting down is achieved when:Price (P) = Average Variable Cost (AVC)In this given situationP= $22AVC = $ 25Since the average variable cost is greater than the price, the firm should shut down its production because it is not even recovering its average variable cost.

The accountant’s statement is flawed in the sense that she is equating total variable costs with the total revenue however; comparison should be between price (marginal revenue) and average variable cost. If the average variable cost is higher than marginal revenue, the firm should shut down to reduce further losses. (Baumol and Blinder)