Question
What are the two approaches to profit maximization under perfect competition? If TR= 400Q -2Q², TC= 1800 +50Q + 3Q². Find the profit maximizing level of output for the firm.
Answer :
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In perfect competition, profit maximization can be explained using two important approaches. The first approach is the Total Revenue (TR) and Total Cost (TC) approach, and the second is the Marginal Revenue (MR) and Marginal Cost (MC) approach. Under perfect competition, a firm is a price taker because it cannot influence market price. Therefore, the price remains constant and marginal revenue is equal to the price of the product. Under the TR-TC approach, profit is maximized when the difference between total revenue and total cost is the greatest. Profit is calculated as π = TR − TC. The firm should choose that level of output where this difference is maximum. In graphical terms, this occurs where the vertical distance between TR and TC curves is the maximum. If TR is greater than TC, the firm earns profit. If TR is equal to TC, the firm breaks even. If TR is less than TC, the firm incurs loss. Thus, the TR-TC approach focuses on total profit rather than per unit profit. Under the MR-MC approach, profit is maximized when marginal revenue equals marginal cost, and the MC curve cuts the MR curve from below. Marginal revenue is
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