Scribd
Upload
453 views

Marginal Analysis For Optimal Decisions

Marginal analysis and optimization techniques can help businesses make optimal decisions by maximizing profits. - Marginal analysis requires finding the point where marginal revenue equals marginal cost. This is the profit-maximizing level of output. - To maximize profits, a business should produce additional output until the point where the increase in marginal costs equals the increase in marginal revenue. Beyond this point, profits will decrease. - Using calculus, the profit-maximizing condition can be found by taking the derivative of total revenue and total cost and setting them equal to find where marginal revenue and marginal cost intersect.

Uploaded by

Mukesh Sahu
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
453 views

Marginal Analysis For Optimal Decisions

Marginal analysis and optimization techniques can help businesses make optimal decisions by maximizing profits. - Marginal analysis requires finding the point where marginal revenue equals marginal cost. This is the profit-maximizing level of output. - To maximize profits, a business should produce additional output until the point where the increase in marginal costs equals the increase in marginal revenue. Beyond this point, profits will decrease. - Using calculus, the profit-maximizing condition can be found by taking the derivative of total revenue and total cost and setting them equal to find where marginal revenue and marginal cost intersect.

Uploaded by

Mukesh Sahu
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 13

Marginal Analysis for optimal

decisions
Optimization Techniques
In Economics different optimization techniques as a solution
to decision making problems
Optimization implies either a variable is maximized or
minimized whichever is required for efficiency purposes,
subject to different constraints imposed on other variables
E.g. Profit Maximization, Cost Minimization, Revenue
Maximization, Output Maximization
A problem of maxima & minima requires the help of
differential calculus
Profit Maximization
Q TR TC Profit
0 0 20 -20
1 90 140 -50
2 160 160 0
3 210 180 30
4 240 240 0
5 250 480 -230
Profit Maximization
0
60
120
180
240
300
0 1 2 3 4 5
Q
($)
MC
MR
TC
TR
-60
-30
0
30
60
Profit
Profit Maximization
Total Profit Approach for Maximization
=TR-TC=> The difference to be maximized in
order to Max. Profit

TR
TC
Q
O
TR, TC
A
B
Marginal Analysis to profit maximization
Marginal Analysis requirement for profit
Maximization,
Marginal Revenue = Marginal Cost
(MR) (MC)
Marginal Value represents slope of Total value
curves,
Thus slopes of TR &TC should be equal


Two output level showing same slope, i.e.
MR=MC












TR
TC
Q
O
TR, TC
A
B
Q
2
Q
1

Interpretation of the previous diagram
MR=MC is a necessary condition for Maximization, not a
sufficient one as this condition also hold for loss maximization
Sufficient condition requires that reaching a point of
maximization, profit should start declining with any further
rise in output, i.e. Slope of TC should rise & Slope of TR must
fall after reaching the point of Maximization,
Change in MC>Change in MR
*Case Study to be discussed: An alleged blunder in the stealth
bombers design

Using derivatives to solve max and min problems
Optimization With Calculus
To optimize Y = f (X):
First Order Condition:
Find X such that dY/dX = 0
Second Order Condition:
A. If d
2
Y/dX
2
> 0, then Y is a minimum.
OR
B. If d
2
Y/dX
2
< 0, then Y is a maximum.
CENTRAL POINT
The dependent variable is maximized when its
marginal value shifts from positive to
negative, and vice versa
The Profit-maximizing rule
Profit( ) = TR TC
At maximum profit
dp/dQ = dTR/dQ - dTC/dQ = 0
So,
dTR/dQ = dTC/dQ (1
st
.O.C.)
==> MR = MC
d
2
TR/ dQ
2
= d
2
TC/dQ
2
(2
nd
O.C.)
==> dMR/dQ < dMC/dQ
This means
slope of MC is greater than slope of MR function
Constrained Optimization
To optimize a function given a
single constraint, imbed the
constraint in the function and
optimize as previously defined

OPTIMAL ADVERSTING EXPENDITURES
Number
of Ads
MBTV MBTV/PTV MBR MBR/PR
1 400 1.0 360 1.2
2 300 0.75 270 0.9
3 280 0.7 240 0.8
4 260 0.65 225 0.75
5 240 0.6 150 0.5
6 200 0.5 120 0.4
Optimal solution: Buy 2 TV ads and 4 radio ads
Optimal choice between number of TV and Radio Ads
Objective Function Maximize benefits (measured in sales)
Budget constraint of $2000, given PTV = $400 &PR=$300
Optimal condition: MBTV/PTV=MBR/PR

You might also like