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Short-run profit maximization
Finance & Accounting
Pages 3 (753 words)
1. Short-run Profit Maximization In business, you obviously want to avoid spending more money than you make. Speaking in terms of production, there is a point where when you start producing too much, it becomes unprofitable. Therefore, it is optimal for a company to produce as long as they are making a profit.
Up until this intersection, marginal revenue will exceed Marginal Cost, whereas after this point, marginal cost will begin to exceed marginal revenue. Thus, in order to maximize short-run profit you should produce up until the cost of producing another unit exceeds revenue gained from producing that unit. The mechanism responsible for pushing optimal output is the demand for the product and the price of the product. Ideally, a business would like to set the price for each unit as high as possible. However, how much you should charge for a product is limited by the demand for that product. So in order to produce at the point where marginal revenue equals marginal cost, the price of the product may need to be either raised or lowered. A popular theory that explains this is known as price elasticity of demand and is expressed as the equation P(1-1/n) = MC. 2. The Agency Problem The text gives a great example of the agency problem by comparing it to the relationship between our country’s president and its citizens. In this case, the citizens are the principle and the president is the agent because the objectives and policies that the president pursues will ultimately effect the citizens of the country. ...
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