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Decisions for Profit Maximization

Managers make decisions with the expectation that profits will increase. Illustrate with one example the managerial problem and the rule or logic the manager should do in order to make a decision that will maximize profits.

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Profit-Maximizing for Managers

To increase profits, the manager follows the underlying profit maximization rule, which views 'profit' as one that includes both implicit (costs of the entrepreneur) and explicit (land, labour, and capital) costs, versus the general business view, where 'profit' revolves around funds from revenues being higher than the explicit costs of the firm.

Profit-Maximization Rule:
In order to maximize profits, taking into account the explicit and implicit costs of the company, the manager must aim to produce the output Q* where the marginal revenue, MR, equals the marginal cost, MC. This represented by the equation: MR=MC. Of course, the general profit equation is P = (Price x Q*)- (wL + rK + sT), where (Price x Q*) represents the Total Revenues of the company, and (wL + rK + sT) represents the Total Costs of the company. Nevertheless, both the revenue and cost sides of the equation can be altered, depending on the numerous revenue streams and sources of costs for the company (it differs for every company). This is the equation simplified.

Explanation of terms:
MR: Marginal Revenue is the change of total revenue when increasing output Q* by one unit
MC: Marginal Cost is the change of ...

Solution Summary

The decisions for profit maximization are determined. The rules or logic the managers should do in order to make a decision that will maximize profits.