The news these days is full of stories about the desperate need for more ventilators to care for patients suffering with Covid-19 (Coronavirus). Ventac manufactures portable ventilators that sell for $18,000 each – far below the $50,000 price tag for larger hospital models. The company typically produces about 100 units a month, but in light of the urgent need they’re being pressed to produce thousands of units as quickly as possible. Based on the profit maximization rule, discussed in Section 13.2b in Chapter 13 in your textbook, we can assume that 100 units is Ventac’s profit maximizing rate of output. What happens to profit when production exceeds the profit maximizing rate of output? Explain why.
At a quantity above the profit-maximizing quantity, the profit of a firm decreases.
We know that the marginal cost equals the marginal revenue (MC = MR) at the profit-maximizing quantity.
MC is generally an increasing function while the marginal revenue remains constant in a perfectly competitive market(remains equal to the market price).
Therefore, as a consequence of the above properties of MC and MR, the MC increases above MR at a quantity above the profit-maximizing quantity.
As a result, the marginal profit (=MR - MC) becomes negative and the total profit decreases.
The news these days is full of stories about the desperate need for more ventilators to...