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Profit Maximizing Quantity of Variable Input -- Marginal Value Product and Marginal Input Cost The previous page focused on the relationship between the level or quantity of variable input and the quantity of output (TPP). The discussion also addressed how managers can identify the range of input in which the business will logically want to produce (that is, Stage II wherein APP is declining but MPP is greater than zero). This page discusses how the manager can further analyze the business to identify the specific level of variable input that will achieve the goal of profit maximization in the short run. The discussion requires that the focus shift from considering the quantity of physical units of variable input and output to considering the cost and revenue associated with the variable input and output. Expressing the data in terms of dollars The next step in the mental process is to convert the units of output into dollar amounts by multiplying the amount of output times the market price of the output. Axes on the graph are now dollar amount and quantity of variable input. 1. Value of total product = total physical product x price of the output VTP = TPP * P The VTP curve illustrates the value of output at each level of variable input. 2. Value of average product = average physical product x price of the output VAP = APP * P = VTP/X The VAP curve illustrates the value of output per unit of variable input at each level of variable input 3. Marginal value product can be described several ways: 1) marginal physical product x price of output; 2) value of additional output resulting from the use of an additional unit of variable input; and 3) amount of increase in the firm's total revenue as a result of using one more unit of variable input. The two most critical factors are the price of the output (Py) and the amount of output the additional variable input will produce (MPPx)
The MVP curve illustrates the value of output for each additional unit of variable input at each level of variable input; it is the value of the output that results from using one more unit of variable input.
Marginal input cost (MIC) is the cost of using an additional unit of variable input; restated, it is the change in total cost due to using additional units of variable input.
The MIC will remain constant regardless of how much of the variable input is used. This is based on the assumption that no one business is large enough to influence the market price for the input regardless of how much of the input the business wants to use. What level of output maximizes profit?
In summary
Next section addresses demand for variable input. Last Updated October 22, 2009 |
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Email: David.Saxowsky@ndsu.edu This material is intended for educational purposes only. It is not a substitute for competent professional advice. Seek appropriate advice for answers to your specific questions. |
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