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If a profit-maximizing firm is producing an output level in which marginal revenue exceeds marginal cost,...

If a profit-maximizing firm is producing an output level in which marginal revenue exceeds marginal cost, should it produce more, less or the same? Why? What is the profit-maximizing quantity for any firm to produce?

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Answer #1

The profit-maximizing condition of a firm is at the point where the marginal revenue = marginal cost. Marginal revenue is the additional revenue generated from an extra unit of output sold. Marginal cost is the additional cost incurred from an extra unit of output produced.

If MR>MC, the firm will find it profitable to increase the output level to the point where MR=MC. Thus, if a profit-maximizing firm is producing an output level in which marginal revenue exceeds marginal cost then it should produce more to the point where marginal revenue equals marginal cost and incur a maximum profit.

If MC>MR then the firm will find it profitable to decrease the output to the level where MR=MC.

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