[barelystayingsane]

It’s been about four years since I took micro econ, and I remember that you’re supposed to produce up to the quantity where marginal revenues equal marginal costs. Is this the same quantity where the marginal cost curve intersects the average total cost curve, thus achieving maximum economies of scale? Or do they not necessarily have to be the same quantity?

Thank you!

[SeattleAccountant]

Hi Barely!

Here we go, BEC stuff 🙂

Alright. Maximum profit and optimum production output occurs at the point where MR = MC, i.e. horizontal line MR (which equals price) intersects with upward sweeping MC (NOT at the point of MC intersecting ATC!). On the graph, this point occurs at the place where the first indication of diseconomies occurs (it is past/right to where MC is intersecting with ATC at the lowest point; showing it on the graph is much easier than explaining this).

To calculate that quantity we need to take first derivative of MR side and MC side and then, set derivative MR – der MC = 0 and solve for quantity.

I highly doubt that CPA exam will test this calculation but have no doubt that theory about it has high probability of showing up 🙂

Just remember that we will produce the most technically efficient/profit maximizing/rational output when [MR = MC] which is same as [MR – MC = 0] or [MR – MC = Marginal Profit = 0] and at that point Total Profit (TP) will be max.

Again, notice that marginal profit is zero while total is max.

Becker Class of Jan - Aug 2013: FARB DONE!!!!
CPA license pending 🙂

[SeattleAccountant]

Oh, yeah, don't forget reason of why we are going to produce as many units as we can (but up to MR = MC): to spread Fixed Costs across production units as much as we can.

Becker Class of Jan - Aug 2013: FARB DONE!!!!
CPA license pending 🙂

[barelystayingsane]

Thanks, SeattleAccountant (again)!!! It's slowly starting to come back to me. So the firm will experience some slight diseconomies of scale to reach optimal production, but it should continue producing until MR = MC, so that total profits are maximized.

[SeattleAccountant]

Hehe, glad to help! It also helps me to review and recheck my knowledge as well.

Yes, basically at the earliest signs of diseconomies it should stop producing.

Becker Class of Jan - Aug 2013: FARB DONE!!!!
CPA license pending 🙂

[Author]

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