Profit Maximization Rule

Definition

• Marginal revenue (MR) is the revenue that the additional unit of output would add to total revenue.
• Marginal cost (MC) is the cost that the additional unit of output would add to total cost.
  • If MR > MC, firm should increase the level of output.
  • If MR < MC, firm should reduce the level of output.
  • If MR = MC, firm produces output level that maximizes its profit.
• Profit maximizing condition: $MR=MC$
• For a perfectly competitive firm, profit is maximized when: $P=MR=MC$