1
$\begingroup$

I have a confusion. Marginal utility is always decreasing and people will not be happy to pay 2 times of price for 2 times of a coffe but I guess the price of producing 2 times of coffe will be the same as producing one unit.

So in this case why this does not cause companies to have less profit from that particular product? Why companies still try to sell as much product as possible while they cannot charge you same amount. (In this case double the price vs double the coffe)

$\endgroup$
2
$\begingroup$

The premise of the question is simply false. Companies do not maximize $Q$ they maximize profit.

For example, consider trivial case of a monopoly. The demand is given by $Q = 10-p$ so demand decreases with price. Now let us suppose the monopoly has constant marginal costs $c(Q)' = 2 \implies c= 2Q$. Given this the profit function of monopoly will be given by:

$$\Pi = p Q - 2Q = (10-Q)Q -2Q$$

With FOCs:

$$ 10 -2Q -2 = 0 \implies Q^*=4 $$

So in this case the monopoly would produce exactly 4 units of products no more no less. The exact quantity of products will be different in different market structures (e.g. duopoly, oligopoly, monopolistic competition, perfect competition), and under different parameters (e.g. demand parameters costs), but generally in all of them there will be some profit maximizing $Q$. So the premise of your question is false. Of course, firms won't just produce goods to dump them into garbage and to loose profit.

$\endgroup$
1
  • $\begingroup$ Thank you a lot $\endgroup$
    – kuti
    May 9 '21 at 17:21

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.