Q&A bank 1A.23

[salonijain]

it is said that to the left of Q1 the lost marginal revenue is less than the saved marginal cost, so profits are higher to the left of Q1
something similar to this is also given for Q2
what does it exactly mean?
i was unable to interpret these two statements...please explain it

 

[Graham Aylott]

Suppose we start at an output of Q1. If we reduce output by one unit, then as the marginal cost (MC) is greater than the marginal revenue (MR) to the left of Q1, the reduction in cost will be greater than the reduction in revenue. Consequently, profit must increase by an amount equal to the difference.

For example, suppose that for the Q1-th unit of output, MC = 7 and MR = 5. Then if we produce one less unit, costs would fall by 7 whilst revenue would fall by only 5, So, profit would increase by 2.

Between Q1 and Q2, MR > MC, so increasing output will increase profit.

Beyond Q2, MC is greater than MR, so increasing output will reduce profit.

I hope this makes sense.

Graham

 

[salonijain]

by moving one unit back costs increase by 7, how does it fall?

 

[Graham Aylott]

If we increase output by one unit, then the total cost of production rises by the marginal cost of that unit.

Likewise, if we reduce output by one unit, then the total cost of production will fall by the marginal cost of that unit.

So, provided the marginal cost is greater than the marginal revenue, then reducing output by one unit will reduce costs by more than it reduces revenue, so leading to an increase in profit.