NIOS Economics (318) Notes/Answer| Chapter-20|Profit maximization

NIOS Economics (318) Notes/Answer| Chapter-20|Profit maximization. Important questions for NIOS Economics (318) Questions Answers brings you latest queries and solutions with accordance to the most recent pointers SOS . Students will clear all their doubts with regard to every chapter by active these necessary chapter queries and elaborate explanations that area unit provided by our specialists so as to assist you higher. These queries can facilitate students prepare well for the exams thanks to time constraint . NIOS Economics (318) Notes/Answer| Chapter-20|Profit maximization.

HS 2nd years Solutions (English Medium)

NIOS Economics (318) Notes/Answer| Chapter-20|Profit maximization

Intext Questions

1. State whether the following statements are true or false: 

(a) Profit is the difference between TR and Money cost.

Ans. False

(b) Profit is the difference between TR and TC

Ans. True

(c) Normal profit is the minimum reward (in money) which a producer must get to induce him to produce a given commodity.

Ans. True

(d) A producer gets just normal profit when TR is greater than TC

Ans. False

(e) Normal profit is the same thing as profit in business sense.

Ans. False

(f) Normal profit is a part of cost. 

Ans. True

(g) When TR = TC, the producer gets only normal profits.

Ans. True

2. State whether the following statements are true or false:

(a) When TR>TC, there are above-normal profits.

Ans. True

(b) When TR=TC, there are normal profits.

Ans. True

(c) When TR<TC, there are profits.

Ans. False

(d) When the excess of TR over TC is minimum, the producer gets maximum profit.

Ans. True

2. Calculate profit at each level of output.

TR Output

Output (Unit)TR (Rs.)TC (Rs.)Profit(Rs.)
17560
2147117
3216180
4282258
5345345

Ans

Output (Unit)TR (Rs.)TC (Rs.)Profit(Rs.)
1756015
214711730
321618036
428225824
53453450

3. State whether the following statements are true or false:

(a) A producer will produce more to maximise profit so long as MR>MC.

Ans. True

(b) When MC = MR the producer gets maximum profit.

Ans. False

(c) When MC = MR and this equality is at that level of output from which profitable movement is possible, the producer gets maximum profit. 

Ans. True 

(d) When TC=TR the producer gets above normal profit. 

Ans. False

Terminal Exercise

1. Explain the meaning of the term ‘profit’. Distinguish between ‘above normal profit’ and ‘normal profit’

Ans. Profit is defined as the difference of total revenue (TR) over total cost (TC) of the firm.So profit = TR – TC.

Above normal profit is defined as the surplus of total revenue over total cost. This means total revenue is greater than total cost. In other words, if the difference between total revenue and total cost is positive or greater than zero, then we can say that the firm is earning above normal profit. On the other hand, when total revenue equals total cost, the difference between them becomes zero. Such a situation is called normal profit or zero profit.

2. Explain the term ‘maximum profit’ as used in micro economics. 

Ans. The term maximum profit refers to that level of output at which ‘above normal profit’ is maximum.

As we know that profit is the difference between total revenue and total cost, profit maximization through this approach states that the firm should produce that quantity of output at which the difference between total revenue and total cost is the maximum (TR-TC is maximum).

QTRTCTR-TC = Profit
11015-5
220200
330228
4402515 TR-TC is maximum
5504010
660600
77085-15

As shown in the table, the TR of a competitive firm is increasing at a constant rate of 10. It starts from 0 when quantity is 0, Then with in each unit increase in the quantity TR is increasing by 10 i.e. when Q = 1, TR = 10.

When Q = 2, TR = 20 and so on. On the other hand, the TC of the firm is 15 even if Q = 0. This is because of the presence of fixed cost as already told in the lesson on cost. TC slowly increases in the beginning and then increases fast with increase in quantity of output. At Q= 1,TC= 15, then at Q=2, TC=20 which is an increase of 5. When Q = 3, TC = 22 which is an increase of 2 i.e. less than the previous unit. After this TC increases faster which you can easily verify.

Now look at the column on profit, marked as TR – TC. At Q=1, TR-TC=-5. This means that there is loss at this level of output because TC > TR. So the firm must increase output. At Q=2, TR=TC so that TR-TC= 0. Here the firm is able to recover the cost. At Q = 3, TR = TC = 8 and at Q = 4, TR -TC= 15. At Q=5, TR-TC= 10 which has fallen from the previous level of 15. At Q=6, TR – TC falls to 0 and then at Q=7, TR-TC is again negative at-15 indicating loss. From this it is clear that at Q = 4, TR-TC is maximum at 15. So firms must produce 4 units to maximize profit because here the difference between TR and TC is maximum. 

3. Explain with the help of total revenue and total cost data how a producer chooses the maximum profit position.

Ans. The term maximum profit refers to that level of output at which ‘above normal profit’ are maximum. 

As we know that profit is the difference between total revenue and total cost, profit maximization through this approach states that the firm should produce that quantity of output at which the difference between total revenue and total cost is the maximum (TR-TC is maximum).

This can be explained by using the following table.

Profit maximization of a firm: TR and TC approach

QTRTCTR-TC = Profit
11015-5
220200
330228
4402515 TR-TC is maximum
5504010
660600
77085-15

As shown in the table, the TR of a competitive firm is increasing at a constant rate of 10. It starts from 0 when quantity is 0, Then within each unit increase in the quantity TR is increasing by 10 i.e. when Q-1, TR = 10.

Q-2, TR-20 and so on. On the other hand, the TC of the firm is 15 even if Q=0. This is because of the presence of fixed cost as already told in the lesson on cost. TC slowly increases in the beginning and then increases fast with increase in quantity of output. 

At Q= 1,TC= 15, then at 

Q=2, TC=20 which is an increase of 5. When 

Q = 3, TC = 22 which is an increase of 2 i.e. less than the previous unit. After this TC increases faster which you can easily verify.

Now look at the column on profit, marked as TR-TC. At Q=1, TR-TC=-5. This means that there is loss at this level of output because TC > TR. So the firm must increase output. 

At Q=2, TR=TC so that TR-TC= 0. Here the firm is able to recover the cost. 

At Q = 3, TR=TC= 8 and 

at Q = 4, TR -TC= 15. At Q=5, TR-TC 10 which has fallen from the previous level of 15. 

At Q=6, TR-TC falls to 0 and then at Q=7, TR-TC is again negative at-15 indicating loss. From this it is clear that 

at Q = 4, TR-TC is maximum at 15. So firms must produce 4 units to maximize profit because here the difference between TR and TC is maximum.

4. Explain with the help of marginal revenue and marginal cost data how a producer chooses the maximum profit position.

Ans. The profits of a firm can be estimated by calculating Marginal Revenue (It is the change in total Revenues by selling of additional Unit of Output) and Marginal cost (it is the addition to the total cost/Total variable cost by producing one additional unit of Output) at difficult levels of Output the profit of a firm will be maximum at that level of output which MC is equal to MR.

MC = MR

or MR-MC=0

MR and MC Equality approach to firms Equilibrium is bent on In (two) conditions. 

  1. First order necessary condition. The Firm’s MC must be equal to its MR at the equilibrium level of Output. (b) Second order or sufficient condition. At the equilibrium level of Output the MC should be using i.e. the MC curve should have positive slope or MC curve intersects MR curve from below.

In the table quantity Q is increasing from 1 to 7. Marginal revenue (MR) is constant at 5 since the firm is under perfect competition (already told in the section on revenue). The marginal cost (MC) starts at 8 and then falls and increases to 5 and continues falling to 4 at Q = 5. After that MC rises to 5 at Q6 and then further rises to 7 at Q = 7.

From the behaviour of MR and MC, you can see that initially between Q = 0 to 1, MC> MR. As MC = 8 and MR = 5. At Q = 1, MC = MR = 5. Then between Q = 2 to Q = 6 MC lies below MR. Then again at Q = 6, MC rises to be equal to MR at 5. We can say that initially when MC> MR there is loss. So the firm must increase output. Then when MC = MR at Q=2 there was no profit and no loss. But after that between Q = 3 to Q = 5, MC lies below MR. This is the zone of profit. For example at Q = 3, MR-MC=5-2=3. At Q = 4, MR-MC =5-3=2. At Q=5, MR-MC=5-4=1. At Q = 6, MR MC 5-5 0..i.e. We can say that profit starts from 0 at Q = 2 to 3 at Q = 3, 2 at Q = 4, 1 at Q = 5 and 0 at Q = 6. Adding all these we get total profit to be 0+3+2+1+0=6, when Q = 6. After that at Q = 7, there is loss again. So profit is maximized at Q = 6. In the table it is clearly shown that MR = MC at two points, one when Q = 2 and then when Q =6.

However at Q = 2, profit was not maximum as the firm had loss earlier at Q = 1 with MC more than MR at the time. But at Q=6, MC = MR, but total profit is already maximum as indicated by the fact that MC was less than MR when they became equal. Also after that MC exceeds MR creating loss. Hence at Q = 6, both the conditions of profit maximization are satisfied.

5. Is ‘minimum total revenue’ position the maximum profit position? Give reason for your answer. 

Ans. TR alone cannot determine profit. Knowledge about TC is essential

6. Is ‘minimum total cost’ position the maximum profit position? Give reason for your answer 

Ans. In order to determine profit, knowledge about TR is essential. TC alone cannot determine profit.

7. Is it enough to say that profit is maximised when MC MR? Give a reason for your answer.

Ans. We will take an example to explain how we can locate the position of maximum profit.

Each additional unit of commodity produced makes a lesser addition to total revenue. This trend can be observed in the column of MR.When 2 units are produced, addition to total revenue by producing 2nd unit falls from Rs.50 to Rs.49. When the 3rd unit is produced, the addition to total revenue falls to Rs.47 and so on. On the other hand, as more is produced MC first falls and then rises.

If the producer produces only 1 unit, the finds that MR is Rs.50 and MC is Rs.45 .So MR>MC and the production of this unit fetches him a profit equal to Rs.5. This induces him to produce more. When he produces 2nd unit, he finds that it’s MR>MC and this fetches him Rs.9 as above normal profit .So he produces still more .When he produces 4th unit he finds MR=MC. For any output less than 6 units MR > MC so he increases production and will stop at the 4th unit. If he increases production beyond the 4th unit, he finds that MC > MR, so the production of this unit results in loss to him. So he will not produce beyond the 4th unit. Any level of output less than 4 units leaves scope for earning profits and any level of output beyond 4 units results in lowering of profits. In this way, if he produces less than 4 units, he is not maximising his profits. And if he produces more than 4 units, again he is not maximising his profits. At this level of output MR = MC. Thus the producer will earn maximum profits if he produces that level of output at which MR = MC.

8. On the basis of the following information locate the maximum profit position of a producer. Give reasons for the choice.

Output (in units)Total Revenue (Rs.)Total cost (Rs.)
33020
44026
55033
66044
77056

Ans 

Output (in units)Total Revenue (Rs.)Total cost (Rs.)Profit (Rs.)
3302010
4402614
5503317
6604416
7705614

In column (4) we find that the profit is maximum (Rs.17) when the level of output is 5 units. So the producer earns a maximum profit of Rs.17 when he produces only 5 units and not any other level of output. Thus we take the excess of TR over TC at each level of output and select the level of output at which this profit is maximum.

NIOS Class 12th Economics (318) Notes/Question Answer

Chapter Chapters NameLink
Chapter 1Economy and Its ProcessClick Here
Chapter 2Basic Problems of an EconomyClick Here
Chapter 3Economic Development and Indian EconomyClick Here
Chapter 4Statistics: Meaning and ScopeClick Here
Chapter 5Making Statistical Data MeaningfulClick Here
Chapter 6Presentation of Statistical DataClick Here
Chapter 7Statistical MethodsClick Here
Chapter 8Index Numbers (Meanings and Its Construction)Click Here
Chapter 9Index Numbers (Problem and Uses)Click Here
Chapter 10Income FlowsClick Here
Chapter 11National Income: ConceptsClick Here
Chapter 12National Income: MeasurementClick Here
Chapter 13Uses of National Income EstimatesClick Here
Chapter 14What micro EconomicsClick Here
Chapter 15What affects demandClick Here
Chapter 16What affects supplyClick Here
Chapter 17Price determinationClick Here
Chapter 18CostClick Here
Chapter 19RevenueClick Here
Chapter 20Profit maximizationClick Here
Chapter 21Government budgetingClick Here
Chapter 22Money supply and its regulationClick Here
Chapter 23Need for planning in IndiaClick Here
Chapter 24Achievements of planning in IndiaClick Here
Chapter 25Recent economic reforms and the role of planningClick Here

Optical Module – I

Chapter 26AgricultureClick Here
Chapter 27IndustryClick Here
Chapter 28Independence of Agriculture and IndustryClick Here
Chapter 29Transport and CommunicationClick Here
Chapter 30EnergyClick Here
Chapter 31Financial InstitutionsClick Here
Chapter 32Social Infrastructure (Housing, Health and Education)Click Here

Optical Module – II

Chapter 33Direction and composition of India’s Foreign tradeClick Here
Chapter 34Foreign exchange rateClick Here
Chapter 35Balance of trade and balance of paymentsClick Here
Chapter 36Inflow of capital (Foreign Capital and Foreign Aid)Click Here
Chapter 37New trade policy and its implicationsClick Here
Chapter 38Population and economic developmentClick Here
Chapter 39Population of IndiaClick Here

9. On the basis of the following, locate the maximum profit position of a producer. Give reason for choice. Also find out the total profit at the maximum profit position.

Output (in units)MR (RS)MC (RS)
1105
2106
3107
4108
5109
61010
71011
81012

Ans 

Output (in units)MR (RS)MC (RS)Above normal profit
11055
21064
31073
41082
51091
610100
71011-1
81012-2

In the above table, from 1 unit of production to 5 units of production MR > MC, but when producer produces 6 units, he finds MR-MC. For any output less than 6 units MR > MC so he increases production and will stop at the 6th unit. If he increases production beyond the 6th unit, he finds that MC > MR, so the production of this unit results in loss to him. So he will not produce beyond 6th unit. Any level of output less than 6 units leaves scope for earning profits and any level of output beyond 6 units results in lowering of profits. In this way, if he produces less than 6 units, he is not maximising his profits. And if he produces more than 6 units, again he is not maximising his profits. At this level of output MR = MC. Thus the producer will earn maximum profits if he produces that level of output at which MR = MC. So the he earn total profit of Rs.15 at the maximum profit position of 6 units

10. Find out the maximum profit position from the following data.

Output (in units)TR (RS)TC (RS)
11012
21820
32424
42136
51850

Is the maximum profit level super normal, or just normal? Give reason for your answer.

Ans

Output (in units)TR (RS)TC (RS)Profit
118122
218202
324240
42136-15
51850-32

In above table, TR = TC, level of profit is Zero at 3 units. Since zero profit is the same as normal profit. It is because normal profit is a part of TR. In a situation when TR=TC, the producer has realised his minimum expectation in full because he has received back the entire cost incurred by him in full, so in micro economic zero profit is the same as normal profit.

11. Find out the maximum profit position from the following data

Output (in units)MR (RS)MC (RS)
1104
295
386
477
568

Also calculate the maximum profit. Comment on the level of profit.

Ans.

Output (in units)MR (RS)MC (RS)Profit
11046
2954
3862
4770
568-2

At 4th unit, MR is equal to MC, so the producer will earn maximum profit, so he will earn profit of Rs. 12 at 4 units of output.

12. Find out the maximum profit position by comparing TC and TR on the basis of following data.

Output (in units)MR (RS)MC (RS)
1127
2119
31010
4911
5812

Ans.

Output (in units)MR (RS)MC (RS)Profit
11275
21193
310100
4611-3
5812-4

In column (4) we find that the profit is maximum (Rs.5) when the level of output is 1 unit. So the producer earns a maximum profit of Rs.5 when he produces only 1 unit and not any other level of output. Thus we take the excess of TR over TC at each level of output and select the level of output at which this profit is maximum.

13. At a particular level of output a producer finds that MR = MC. Is the producer getting maximum profit in this situation? If not, why?

Ans. However, the equality of MR and MC alone does not ensure maximum profit to a producer. The equality must be at such level of output from which no profitable movement in terms of changing the level of output is possible.it may be possible that the MR and MC may be equal to two different levels of output .in such a situation that level of output would be maximised when MR is equal to MC at such a level of output beyond which MR<MC and prior to that MR>MC. 

Let us take an example to further clarify this point:

In this example we find that MR and MC are equal at two different levels of output. They are equal when only I unit is produced and they are also equal when 4 units are produced So which level of output should be producer produce. If he decides to produce only 1 unit, we find that he will not be earning the profit which the production of 2nd and 3rd unit can fetch him because for these units MR>MC. So by producing only one unit, he will not be maximising his profits, although at this level of output MR-MC. Hence, he will not stop at unit one. He will produce the 2nd unit,3rd unit and will go upto 4″ unit.At 4th unit MR and MC are again equal .But here besides the equality of MR and MC, we find that further production will result in losses as MR<MC for the 5the unit and lowering of total profits.Similarly lesser production will mean forgoing profits as for all the units less than 4 units MR>MC. Thus any change from the level of output of 4 units will reduce his profits Hence he will get maximum profit if he produces only 4 units.

14. Explain what will a producer do to maximise profit when he finds that at a particular level of output MC<MR?

Ans.

Each additional unit of commodity produced makes a lesser addition to total revenue. This trend can be observed in the column of MR.When 2 units are produced, addition to total revenue by producing 2nd unit falls from Rs.50 to Rs.49. When the 3rd unit is produced, the addition to total revenue falls to Rs.47 and so on. On the other hand, as more is produced MC first falls and then rises.

If the producer produces only 1 unit, the finds that MR is Rs.50 and MC is Rs.45 .So MR>MC and the production of this unit fetches him a profit equal to Rs.5.This induces him to produce more. When he produces 2nd unit, he finds that its MR>MC and this fetches him Rs.9 as above normal profit.So he produces still more .When he produces 4th unit he finds MR=MC. For any output less than 6 units MR > MC so he increases production and will stop at the 4th unit. If he increases production beyond the 4th unit, he finds that MC > MR, so the production of this unit results in loss to him. So he will not produce beyond the 4th unit. Any level of output less than 4 units leaves scope for earning profits and any level of output beyond 4 units results in lowering of profits. In this way, if he produces less than 4 units, he is not maximizing his profits. And if he produces more than 4 units, again he is not maximizing his profits. At this level of output MR = MC. Thus the producer will earn maximum profits if he produces that level of output at which MR = MC.

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