Economics – Reply to Peer’s Discussion Question W4Q1

I have to reply to 2 peer’s post. Please find the attachment of both peers reply. Please compose reply for both posts in the attached documents.Each response should be minimum of 200 words excluding reference. RequirementForums Guidelines CriteriaRequirementsQuality Guidelines (50%):Responses are original in content with a minimum of one external reference.All posts demonstrated analysis of the topic.Responses to classmates are significant and advanced the discussion.Participation Guidelines (30%):Responses to classmates are at least 200 words.Clarity, Organization & Professionalism Guidelines (20%):Responses were organized and logical.No spelling or grammatical errors.References were used and cited properly.Appropriate language, respect and consideration toward peers/instructor.
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Peer Response â?? 1
In today’s world almost every firm wants an extra unit of output to add more to the revenue
than to the cost. When the extra unit of output produced and sold adds more to revenue in
comparison to cost, it becomes profitable for the firm to produce that unit. On the other hand,
if an extra unit of output produced and sold adds more to cost in comparison to revenue, it
means losses to a firm. So, every firm wants to increase its production until marginal revenue
keeps exceeding the marginal cost because this means the increase in profit.
This increase in profit keeps happening until marginal revenue becomes equal to marginal cost
because after that marginal cost exceeds the marginal revenue and profit starts declining. For
the firm to make maximum profit, at the level of output where MC equals the MR because
below that level of output profit can be increased further whereas above that level of output,
profit starts declining or losses starts accruing. Therefore, the equality of marginal revenue and
marginal cost is essential for the profit maximization in all market structure.
In purely competitive industry price equals MR. This happens because the firm in a purely
competitive industry is a price taker and can sell as much as it can at the given price and thus
each additional unit sold by the firm increases the total revenue of the firm by the amount of
the price. The change in total revenue is marginal revenue and as total revenue is changing by
the amount of price, therefore, price equals the marginal revenue under perfectly competitive
market. Therefore, due to this equality of P and MR price can be substituted for marginal
revenue in the MR = MC rule when an industry is purely competitive.
Peer Response â?? 2
A firmâ??s primary focus is generating revenue, which if managed correctly should maximize
profit. To ensure firms are maximizing profit firms should compare Marginal Revenue (MR) and
Marginal Costs (MC) of each successful unit of output. Assuming that a firm is shutting down
production analysis is required to understand if output is in favor of producing any unit where
Marginal Revenue exceeds Marginal Costs, as there would be a higher revenue associated with
that. If the Marginal Costs of the output is greater than Marginal Revenue, that unit should not
be produced, as there would be a greater cost than revenue, with a lesser profit (Brue,
McConnell, Flynn, pg. 157).
MR=MC is a method of determining the total output which the economic profit is at a
maximum (or losses and a minimum). In Pure Competition, Marginal Revenue and Price are
equal.
There are three key features to MR=MC:
1. This rule only applies if producing in preferable to shutting down
2. This rule is an accurate guide to profit maximization for all firms (monopolistic,
monopolistically competitive, or oligopolistic).
3. Demand is elastic since the firm can sell as much product at market price. MR=MC is a profit
maximizing guide. In pure competition, (P) may be substituted for MR (Brue, McConnell,
Flynn, pg. 157).
Two other interesting examples where MR=MC being were in regards to:
1. Hours of operation: You decide to stay open as long as the added revenue from the
additional hour exceeds the cost of remaining open another hour.
2. Television advertising: You should increase the number of times you run your TV
commercial as long as the added revenue from running it one more time outweighs the
added cost of running it one more time (Agarwal, 2017)

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