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MBS I Sem Ch-1
MBS I Sem Ch-1
Managerial Economics
MBS FIRST SEMESTER
T R I B H U VA N U N I V E R S I T Y
2019
Managerial Economics :
Use of economic concepts and decision sciences to solve managerial decision making problems.
◦ Inventory Management
TR, TC, π
s
los
TR
nts
i B
Po
ven
akE R
e
Br π
A C
s
los
O Output
Q1 Q2 Q3
Profitable range of output
s
Po B
los
ven R
E
e ak
Br π
A C TR
s
H
los
O Output
Q1 Q2 Q3
Profitable range of output
π
Profit Maximization in Imperfect Competition Market
26
KAMAL REGMI, SHANKER DEV CAMPUS KATHMANDU 26
B.MR-MC Approach:
o It is another alternative approach to explain profit maximization objective of
firms.
o Marginal Revenue(MR) refers to the additional revenue received by the firm by
selling one extra unit of output.
o Marginal Cost (MC) refers to the additional cost incurred in producing one
additional unit of output.
o There are two conditions to be satisfied for firms equilibrium under this
approach, which are:
1. Necessary/First order condition: MR=MC
2. Sufficient /Second Order condition: Slope of MC>Slope of MR or MC curve must
Intersect MR curve from below.
R/C/π F MC
P
AC
Profit
C G
E
AR
O Output
Q
MR
28
KAMAL REGMI, SHANKER DEV CAMPUS KATHMANDU 28
Mathematically,
We Know that,
TR TC
For Maximization of Profit, S .O.C.
F .O.C , d 2
or , 2 0
d d (TR TC ) dQ
0, i.e. 0
dQ dQ d
or , ( MR MC ) 0
d (TR ) d (TC ) dQ
0
dQ dQ d ( MR ) d ( MC )
or , 0
MR MC 0 dQ dQ
MR MC Or, Slope of MR-Slope of MC<0
Or, Slope of MR < Slope of MC
Where,
P.V. present value of expected future profits
1, 2 . . . n mean profit of each year
r rate of discount or rate of interest
KAMAL REGMI, SHANKER DEV CAMPUS KATHMANDU 34
Contd…
o Since, profit is the difference between total revenue and total cost. Hence, the eqn. (i)
can be written as
If You have to decide between those projects to investment following value maximization model,
which project will you choose to invest? Justify with proper reasons.
U = f(S, M, ID)
Where,
U = manager's utility
S = staff expenditure
M = managerial emoluments
ID = discretionary investment
The actual profit is the current profit of firm which is the difference between total
revenue (R) and Total cost (C) including staff expenditure i.e. π = R - C – S